KORE Group Holdings, Inc.

Greetings and welcome to the Core Group Holdings fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Charlie Brady, Vice President of Investor Relations, to begin. Thank you.

Thank you, Operator. On today's call, we'll be referring to the fourth quarter 2022 earnings presentation that will be helpful to follow along with, as well as the press release filed this afternoon that details the company's fourth quarter 2022 results, both of which can be found on the investor relations page at ir.corewireless.com. 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 today's press release. as well as in the company's filings with the Securities and Exchange Commission, which identifies 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 it will be discussing non-GAAP financial information on this call. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States, or GAAP. You can find a reconciliation of these metrics to the company's reported GAAP results in the reconciliation tables provided in today's earnings release and presentation. I'll now turn the call over to Roland Bao, the company's president and chief executive officer.

Thank you, Charlie. Good afternoon, everyone, and thank you for joining us today for our fourth quarter 2022 earnings call. With me is Paul Holtz, Core's Chief Financial Officer. As always, we will start with an overview of our key announcements, including our separate announcement this morning that we are acquiring Twilio's IoT business, which we believe is a fantastic fit with our growth strategy. The Twilio business unit strengthens Core's eSIM leadership position and expands Core's existing deploy, manage, and scale value proposition by adding build services, thereby bolstering our competitive positioning as a one-stop shop for IoT connectivity and deployment. Following this, we will present an overview of our financial results for the fourth quarter and full year 2022, and provide financial guidance for 2023. We will finish with a Q&A session. This morning, we announced that Core has signed a definitive agreement to acquire Twilio's IoT business. In this transaction, as consideration for Core's acquisition of Twilio's IoT business, Twilio is taking an equity ownership position in Core of 10 million shares of common stock. Upon closing, Twilio will become one of Core's largest shareholders, representing a vote of confidence in Core's leading pure play IoT position. We expect the acquisition will be slightly dilutive to EBITDA in 2023 and accretive beginning in 2024. Our initial 2023 guidance, which I will discuss shortly, includes the addition of Twilio's IoT business from an assumed closing date of June 1st. We believe this transaction is a win-win-win for Core and Twilio, and customers of both companies. There are several dimensions to the overall strategic rationale of this deal. First, Core is a leader in the IoT connectivity market, and we intend to be one of the few large IoT hyperscalers following the inevitable and ongoing market consolidation. We believe adding the Twilio IoT business accelerates our journey to fulfill this vision And with Twilio taking an equity ownership interest in Core, it bodes well for potential future go-to-market collaboration and lead flow. Second, Twilio has pioneered the digital purchase and consumption of IoT connectivity, just like AWS and others did for compute and storage services. At Core, we believe this is the future of IoT connectivity. And with Twilio's IoT business, we believe we are adding the industry's strongest capability for the digital consumption of IoT. This will form a critical component of our future distribution strategy and profitable growth as it reduces customer acquisition costs. Third, the combination of core OmniSIM and Twilio SuperSIM represents the leading IoT connectivity product in the market combining the best of global connectivity with compliant local access, which is more important than ever for global IoT deployments. Fourth, Twilio has incubated their IoT business with significant investments, including attracting the developer persona by enabling the rapid design and build of devices that ease the adoption of IoT. Core gains the benefit of these investments, and we add build to our deploy manage scale story. Finally, outside the five largest global MNOs, the combination of Twilio's and Core's connections will position Core as the largest provider of IoT connectivity outside of China. I will add that the combination of Core's white glove customer experience and Twilio's digital experience provides a solid foundation for strong growth through the decade of IoT ahead. powered by a culturally aligned world-class pool of talent from both organizations. The diagram on slide five represents the power of bringing together Twilio IoT and Core. If you just work your way down those lines, the combination of Core's OmniSIM and Twilio's SuperSIM provides the leading global eSIM proposition. Core has invested in building out our deploy, manage, scale value proposition, and by adding Twilio's device builder capability, we broaden our value proposition to build, deploy, manage, and scale. A further step in our one-stop shop positioning. The new core has the ability to optimize our cellular core network from two best-in-breed solutions. Importantly, while Core has begun the implementation of a developer portal, Twilio is a recognized leader in digital experience and has established relationships with thousands of IoT developers whom we welcome to Core. The introduction of these developers to Core's offerings creates expansion opportunities into this rapidly growing segment of the market. We are already building a Twilio-like web console, which we will accelerate upon closing the acquisition. in combination with our white glove customer support, represents an important dimension of our growth strategy. To the Twilio IoT team, let me say we are very excited to add such great talent and expertise to core, and we cannot wait to start working together. Now let's move on to other highlights from the quarter, which demonstrate the continued execution of our strategy to help customers deploy, manage, and scale solutions and simplify the complexities of IoT. most notably our December announcement of a multi-year go-to-market alliance with Google Cloud Platform, wherein Core will provide Google Cloud customers with a one-stop shop for IoT services by leveraging Core's IoT solutions and Google Cloud's infrastructure. We also introduced OmniSIM Safe using AWS IoT Core, to mitigate security challenges associated with global massive IoT deployments, complete with device to cloud integration. The core OmniSIM safe connectivity solution is an innovative eSIM approach that uses the GSMA IoT safe standard and supports zero touch provisioning to allow pairing a device to the cloud with minimal physical intervention. And finally, We were excited to announce that CORE will be providing IoT connectivity and managed services for CareDaily, an in-home senior care SaaS company with an AI assistant IoT platform aimed at helping seniors age in place safely and autonomously, while also providing communication with healthcare providers and family. CORE's IoT managed services ensure that CareDaily's device and hardware needs are met seamlessly through procurement, configuration, kitting, shipping, and reverse logistics. Now let's look at our fourth quarter financial results on slide seven. Our fourth quarter revenue was stronger than expected, resulting in full year revenue coming in above the guidance range, which we had already increased following our third quarter results. For the full year 2022, our net activations overcame the forced churn of approximately 1.2 million 2G and 3G SIMs. Fourth quarter revenue of $62.4 million declined 3% year-over-year, primarily due to a difficult comparison as the year-ago quarter included significant revenue from the LTE transition project at our largest customer. Additionally, the 2G, 3G sunsets in the U.S. impacted our fourth quarter performance. These two factors have masked Core's underlying growth for the past several quarters. Excluding the impact of the LTE transition project, fourth quarter 2022 revenue increased 11% year over year, indicating the true organic growth masked by these transitory factors. From this, we believe the fourth quarter represented a near-term revenue trough, and we continue to expect revenue in the first quarter of 2023 to increase sequentially. Gross margin increased 600 basis points year-over-year to 54.1% due to continued optimization of our carrier costs and the absence of lower margin LTE transition project volumes with our largest customer. Fourth quarter adjusted EBITDA of $15.7 million increased 20% from the fourth quarter of 2021, and adjusted EBITDA margin was 25.1%, compared to 20.3% in the year-ago quarter. Turning to slide eight, we present an overview of our full-year 2022 results and our guidance for 2023. Total revenue of $268.4 million increased 8% year-over-year, and gross margin improved by 80 basis points to 51.9%. Adjusted EBITDA of $62.8 million increased 6% compared to 2021. Finally, cash provided by operating activities improved by more than $32 million year over year. Paul will discuss the full year results in more detail later in the call, but before I turn it over to him, I'd like to present our 2023 outlook. To provide context, on prior calls, we estimated the 2023 headwinds from the 2G and 3G sunsets and the LTE transition project at our largest customer to be approximately $12 million each. And despite this $24 million headwind, Core's 2023 revenue was forecast to grow in the mid to high single digits. With the acquisition of Twilio's IoT business and an assumed closing of June 1st, year over year revenue growth is now projected to be in the mid teens. As such, Our guidance for 2023 is revenue in the range of $300 million to $310 million and adjusted EBITDA in the range of $60 to $62 million, implying an adjusted EBITDA margin of approximately 20%. With that, I will now hand the call over to Paul to cover the financials in more detail. Paul?

Thanks, Romal, and good afternoon, everyone. For those who are following CORE, you already are aware that we filed a Form 12B25 with the SEC on Friday, March 17th, with respect to our Form 10K for fiscal year 2022. As indicated in the Form 12B25, during the process of preparing our fiscal year 2022 financial statements, we discovered misstatements related to various items, but mainly involving current and deferred income tax liabilities or benefits, in the various foreign jurisdictions that we operate in. The tax misstatements relate to prior periods, including periods prior to CORE becoming a public company. Management, the Audit Committee, and our external auditors have all concluded that the misstatements are not material and will result in a revision of prior period financial statements in the 2022 Form 10-K, which we intend to file on March 31st. These revisions will also include correcting all prior years' immaterial unadjusted audit differences. Now on to our results. First slide 9, fourth quarter revenue declined 3% year-over-year to $62.4 million compared to $64.4 million in the fourth quarter of 2021. As previously communicated, the fourth quarter of 2021 included revenue attributed to the LTE transition project at our largest customer, which concluded in Q2 2022. Revenue growth was also impacted by various carrier 2G, 3G sunsets in the United States, which were essentially completed by the end of 2022. By segment, IoT connectivity revenue of $43.7 million increased 1% year over year. Growth from new and existing customers, excluding non-core customers, was approximately 7% year over year. Offsetting this growth was the decline in the non-core customer revenue cohort and the negative impact of lower pricing to existing customers related to the shift of 2G, 3G devices to LTE. All of these combined to reduce revenue growth by approximately 6% year-over-year. IoT solutions revenue declined 11% year-over-year to $18.7 million. The decline was driven by the difficult year-over-year comparison as the fourth quarter of 2021 included significant revenue related to the LTE transition project at our largest customer. To put this in perspective, in the fourth quarter of 2021, the LTE transition project revenue accounted for about one-third of total IoT Solutions revenue. Excluding the LTE transition project revenue, IoT Solutions revenue would have increased 30% year-over-year. Total gross margin was 54.1%. an increase of approximately 600 basis points year-over-year. IoT connectivity gross margin increased 500 basis points year-over-year to 65.1%, driven by the continued optimization of our carrier costs as volumes and data usage increased. IoT solution gross margin increased 510 basis points year-over-year to 28.7%. mainly driven by the absence of lower margin LTE transition revenues from our largest customer in the current quarter. Total connections at the end of the fourth quarter were 15 million, an increase of over 400,000 compared to the end of the fourth quarter of 2021. This is net of the two G3G sunsets in the United States of approximately 1.2 million SIMs that were forced to churn throughout the year, including the loss of approximately 150,000 2G, 3G connected devices on the last day of the year. Dollar-based net expansion rate, or DBNER, for the 12 months ended December 31, 2022, was 92% compared to 122% in the prior year. As a reminder, DBNER measures the growth from existing customers in the trailing 12 months compared to the same customer cohort in the year-ago period, much like same-store sales growth rate. As expected, DBNER was down sequentially from the third quarter and year-over-year as the trailing 12-month measurement continues to be impacted by the LTE transition revenue from our largest customer, which peaked in the third quarter of 2021 and was completed early in the second quarter of 2022. Excluding total revenue from our largest customer, DBNER at the end of the quarter would have been 103%, compared to 115% at the end of the fourth quarter of 2021. Operating expenses, including depreciation and amortization in the fourth quarter were $97 million, an increase of $59.1 million or 156% compared to the same period last year. This includes the non-cash goodwill impairment charge of $56.9 million which is a GAAP-required impairment and is entirely due to the sustained decline in our share price and market capitalization, which is a triggering event under ASC 350. Excluding the goodwill impairment charge, operating expenses increased approximately $2.2 million or 5.8%. Increases included salary and benefit costs and contractor costs, higher travel expenses, professional services, channel commissions, and incremental operating expenses associated with the BNP and Simon acquisitions that didn't exist in Q4 2021. These increases were offset by lower D&O insurance and marketing costs. Fourth quarter interest expense, including amortization of deferred financing fees, increased year-over-year to $9.2 million due to increased borrowing costs on our senior secured term loans. We expect interest expense will be approximately $9.5 to $10 million per quarter in 2023. Net loss in the fourth quarter was $68.8 million compared to $12.2 million in the same period in the prior year. The net loss includes the non-cash goodwill impairment charge that I mentioned earlier. Adjusted EBITDA in the fourth quarter was $15.7 million, an increase of $2.6 million, or approximately 20% compared to the same period last year. Our adjusted EBITDA margin in the current quarter was 25.1%, up 480 basis points compared to the same period in the prior year. Moving to cash flow. Cash used in operations for the three months ending December 31, 2022 was approximately $5 million. This compared to a similar amount of cash used in operations for the same period in the prior year. At the end of the fourth quarter, cash and cash equivalents were $35 million, compared to $86.3 million as of December 31, 2021. This change was primarily related to the financing of the BNP Simon acquisition in Q1 2022. Cash and cash equivalents were lower than expected at the end of Q4 2022, as we saw slower collections in December this year as customers pushed out payments until January. Six million of collections from various customers were received on January 2nd. that were due and expected to be collected in December. Turning to our full year 2022 results, total revenue of $268.4 million increased 8% from 2021. IoT connectivity revenue increased 4% to $175.9 million, and IoT solutions revenue increased 16.5% to $92.5 million. Full year gross margin of 51.9% was up 80 basis points from 2021. This was driven by a 330-point basis increase in IoT connectivity margin to 64.2%, partially offset by a 180-basis point decline in IoT solutions margin to 28.5%. Adjusted EBITDA for the year was 62.8 million, resulting in an adjusted EBITDA margin of 23.4%. This compares to 60.9 million and 24.5% in 2021. Note that prior year audit adjustments reduced fiscal year 2022's adjusted EBITDA by approximately $300,000. This amount was moved to 2021. Without these adjustments, we would have been in our previously communicated adjusted EBITDA 2020 guidance range of $63 to $64 million. Full year 2022 net loss of $105.4 million, which includes the fourth quarter goodwill impairment charges, increased $80.6 million compared to the full year 2021 net loss of $24.8 million. Excluding the goodwill impairment charge of $56.9 million, the full year 2022 net loss increased $23.7 million to $48.5 million. Attributing to this increase in net loss year-over-year were increases in the following, interest expense, depreciation and amortizations related to the BNP acquisition, stock-based compensation, change in the fair value of our warrant liability, and operating costs associated with it being a public company. And with that, I'll pass it back to Romo.

Thanks, Paul. Last quarter, we began providing additional insight into our global sales pipeline, which you see on slide 11. As of December 31st, 2022, our pipeline has grown to include approximately 1,400 opportunities with a potential total contract value, or TCV, in excess of $430 million. In the fourth quarter, we added $30 million to our closed one TCV, thereby ending the year at $102 million, exceeding our goal for the year, even while increasing the size of our overall funnel. While we expect to recognize the majority of sold TCV as revenue over four years, it is important to note that the closed TCV figure is aggregated across all of our business lines, which have different durations of revenue recognition. IoT connectivity revenue tends to have a slower ramp and can go out beyond the four years we use for TCV calculations, while IoT managed services include both one-time revenue projects that is generally recognized in one to two years and recurring revenue usually recognized over three years. The important summary point is that our closed one TCV continues to show solid growth in how we are adding new business and is additive to our 80% plus annual recurring revenue. Given this, we feel confident in our revenue growth forecast for 2023. Slide 12 showcases a few examples of our wins in the fourth quarter, that contributed to the increase in our closed-one TCV. Our strategy of building pre-configured solutions is starting to prove out. In the fourth quarter, we signed two pilot agreements to begin integration and testing of our connected health telemetry solution, or CHTS, with a clinical research organization and a large remote patient monitoring services provider. CHTS simplifies remote data capture for healthcare and life sciences applications, speeds time to market, and we believe will drive the adoption of large-scale remote patient monitoring initiatives. Additionally, we added approximately $1 million in TCV from an existing fleet customer that is now leveraging our video telematics pre-configured solution to manage their fleet. Our eSIM offering, Core OmniSIM, is starting to be a differentiator for core and is gaining traction in the market as demonstrated by a win at a leading global provider of cold chain tracking and another win in support of a customer's SD-WAN offering. OmniSIM's multi-carrier downloadable profiles were a key driver of these wins. Slide 13 illustrates the core roadmap as the company has evolved from a narrow focus on IoT connectivity to a comprehensive approach that includes technology-driven IoT services and solutions that help customers navigate the many complexities of IoT deployment. Over the coming years in this decade of IoT, we see significant opportunities in analytics, which is a small part of our business today, as well as massive IoT edge computing and becoming an IoT connectivity hyperscaler. Today, Connected Health and Fleet comprise approximately 60% of Core's total revenue. Over time, we expect to expand our presence in other targeted industry verticals where we can apply our deep knowledge of IoT connectivity solutions and analytics. This will in turn expand and increase our TAM and drive further growth. As you have all heard, we had another solid quarter and finish to our year. We exceeded our $457 million GoPublic 2021 and 2022 two-year stack revenue forecast by $60 million. We have expanded our market reach by collaborating with other leading companies in IoT, such as Google Cloud Platform and AWS, and introduced best-in-class products such as our eSIM solutions, which we call Core OmniSIM Rush for global high bandwidth usage needs, and OmniSIM Reach, which can connect customers across 500 networks in 215 countries. With over 80% recurring revenue, the majority of which is tied to mission-critical applications, Core is largely recession-resistant and has a strong presence in rapidly growing end markets such as connected health, our largest industry vertical. Given this backdrop and the increase in TCV, which I previously discussed, we are confident in the revenue and adjusted EBITDA guidance we are providing today. I want to thank all of our employees across the globe, the core IoTers, as we call them, for their continued hard work, dedication, and commitment to core and to our customers. And welcome again to the Twilio IoT team. We cannot wait for you to join the core family.

With that, let's start the Q&A.

Thank you. And ladies and gentlemen, at this time, we will conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number 2 if you would 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. Once again, to queue up for a question, press star one on your telephone keypad.

Thank you.

And our first question comes from Michael Lattimore with Northland Capital. Please state your question.

Hi, this is Aditya on behalf of Mike Lattimore. Could you give some color on the sales cycle? Are you seeing a longer sales cycle or smaller given the macro concerns? Yeah, sure.

You know, we haven't seen anything really materially different in our sales cycles. Deals that are more complex or larger enterprise type deals that just naturally take longer because those entities have longer, more formalized processes, et cetera. Those kinds of reasons are really still the predominant reason why a sales cycle is longer rather than shorter. What we have seen a little bit in terms of our customers and potential customers responding, if you will, to the macroeconomic environment to which you are undoubtedly sort of referring, is a little bit of a shift from top line growth or revenue enablement type opportunities to more automation, more cost optimization and efficiency oriented opportunities or processes enabled by IoT. But that's the beauty of our business is we are, you know, obviously highly applicable both to top line and to bottom line, you know, very cross industry in nature, high recurring revenue in nature. And so we feel really pretty good about being resistant to any kind of recessionary pressures that may come.

All right. And some color on the supply chain as well. Is the supply chain loosening? How could that help the gross margin and revenue growth this year?

I'm sorry, ask the second part of the question. You said there's the supply chain loosening and then what?

Yeah, yeah. How could that help the gross margin and revenue growth this year?

Yeah. So, you know, there are some signs of the supply chain loosening, but it's definitely a sector by sector, device type by device type type of story. We are not out of the woods yet in terms of our customers' ability to to procure devices at the volume that we'd certainly like to see. And obviously, when they're not able to get their devices, they're not placing orders with us for deployment. But we continue to be hopeful that by the end of this year, we will see ongoing improvement that we have seen over the last few months. We need another, I think, 12, 18 months to really dig out of the hole that we've been in and hopefully then see our volume growth return. In terms of, you know, is the supply chain really impacting gross margins and so on? I mean, yeah, look, I mean, in some cases where we are, I'll say, merely passing along price increases or a little bit more than price increases, our gross margins may be declining a slight bit. And, you know, again, the supply chain has to open up and some of these inflationary price points have to get back and get back to stability. And maybe there's some improvement there. But again, none of this is particularly significant to us, right? I mean, our gross margins, for example, on the IoT connectivity side are driven entirely by how well we can optimize, how well we can run our algorithms to optimize our spend, even as our customers are spending more with us using more bandwidth. It's those kinds of factors that have much more significant impact on our gross margin rather than the supply chain per se.

All right. Fine. Thank you. Thank you.

Our next question comes from Scott Serrell with Roth MKM. Please state your question.

Hey, good afternoon. Thanks for taking my questions. Very exciting news on Twilio. I'd like to, I guess, dive right in on that front if I could. In terms of the guidance, you know, looking at where the street was before versus what you're guiding to now in terms of that $300 to $310 million, is that delta entirely due to the Twilio contribution closing on June 1st? Just trying to get my hands around it because it implies, you know, $25 million or so on an annualized basis, $40 million. with slightly negative EBITDA, I think, relative to where the street was before. Is that correct, or can you calibrate us in terms of what else is going on within the core's core business? Are there some other elements there that are starting to ramp up a little bit faster than expected? And also, are there some other metrics to talk about in terms of gross margins, employees, you know, customers, installed devices, et cetera, within the Twilio base to kind of start to frame the opportunity going forward?

Yeah, thanks, Scott. Look, we're certainly very excited about the, you know, sort of I'll call it potential acquisition, right? Because while the agreement is, of course, definitive, the close is ahead. I mean, it's just such a great fit with our core business, right? Our IoT connectivity business fits right in there to accelerate the journey we're on. It adds some complimentary capabilities. We certainly think there's a best-in-market type eSIM offering when you put the Twilio SuperSIM together with Core OmniSIM. Anyway, all these aspects that the people, world-class, I think this is going to be a very meaningful acquisition in terms of strengthening our core business. But at the same time, we sort of have to recognize two things, right? One, it is not going to be material to our overall numbers, right? And so there are no sort of disclosure requirements too. And perhaps more importantly, um, you know, we have to be respectful of Twilio. Twilio is a public company. They do not disclose these numbers today. We are not going to disclose them, uh, certainly not until we close and most likely not even after that. So, uh, Apologies, but I'm not going to confirm or deny those numbers you came out with there, Scott.

Okay, fair enough. But if I could, Ramal, just following up, in terms of the opportunity there, besides some of the technology value, they have a very valuable developer and customer-based community. Is that part of the excitement there? Is there a way to kind of talk about monetizing that opportunity set within Twilio? And also, just curious, does Twilio get a board seat? Are they planning on holding the stock? Any other calls you could provide on that? And then I had one other follow-up.

Okay, yeah, no worries. And again, thank you. I certainly understand the line of questioning, and frankly, I appreciate it. Look, so first of all, you are very correct that the digital front-end – Yeah, I think I said this in my prepared remarks, but we really believe that this is the strongest capability for the digital consumption of IoT in the market, period, right? And as you would recognize, if I was to sort of simplistically divide up the technology stack and services to provide world-class IoT services to the market into three areas, right, the first being all of the backend kind of carrier relationships, the 45 MNO backend integrations that we have, the satellite LoRa stuff that we can do, et cetera. That's one category. And as you know, we are absolutely the global leader in all of that. The second big component is the connectivity management platform itself. And our seven engines and our IoT, our core one IoT platform, connectivity pro on top of that has emerged, has really leapfrogged much of the market. And so we've been all over that. And so if you really say, okay, the next three years, et cetera, would have been around building out that digital front end, building out, I mean, we're sort of, you know, in experimental slash early stage with our own developer ecosystem, with our own digital front end console and so on. It is so complimentary to get this set of assets from Twilio, which by the way, includes a relatively rich patent portfolio and some IP, but also just importantly, these people, their experiences, right? That they will massively accelerate our development of these things. And look, they were just born digital. They were born in Twilio. That is what Twilio does, is this cult developer persona kind of, you know, following that they have. So you're absolutely correct. That is one of the most exciting parts of this story. The second sort of excitement that we have is, of course, and look, I mean, assuming June 1, the close happens, yeah, you know, the first six, seven months will be focused primarily on ensuring their customers are having a very seamless experience, are feeling very good about, you know, our expanded capabilities, that sort of thing, and being a part of kind of the new core as their key supplier and partner. But we'll also be focused on driving profitability improvements, which we're very confident will lead to a creative 2024. I think much of 2024 then is about, on the one hand, cross-selling, right? into cross-selling our deploy managed scale, our IoT managed services, maybe even our downloadable eSIM to existing Twilio customers, right? Even as we're merging the product set. And around the end of 2024, right, give or take a few months, we should have been able to put together, we should be able to put together the best of Twilio SuperSIM and Core OmniSIM I don't know what the marketing team will end up recommending for a name, but let's call it the super omni sim for now. That super omni sim, if it's the market leading product, we believe it can be, will start to drive real revenue synergies going into 2025 and beyond. And at that point, we won't be just talking about accretive, we'll be talking about, you know, excitingly accretive going forward. So that's sort of the vision we have for this. And I apologize if I missed the second part of your question because I got so passionate about the first one.

No, no, that's fine. And lastly, if I could, and I'll get back into the queue, but I just want to clarify your comments about sequential progression of revenues as we go into the first quarter. I thought you said we should see sequential increases, but I wanted to clarify, is that just on the connectivity and services front? Is that an aggregate for core proper, the entire entity? particularly around ARPUs. You know, we've been going through the transition of sunsetting for 2G and 3G connections. Now that we're past that and you're starting to add higher value video and CRO opportunities, do we finally start to see the ARPUs starting to move back in the other direction? Thanks.

Yeah, no, really good questions. Yeah, look, we were, you know, relatively confidently stating without providing guidance on the last call that, even net of the $24 million hole, right? The $12 million sort of headwind from our largest customers LTE transition project going away. And then the 2G, 3G revenue of about $12 million in 2022, that was obviously not going to be replicated in 2023. That despite that, we thought we could put up growth numbers organically kind of in the mid to high single digits. And you undoubtedly used some percentage in there, Scott, and then sort of subtracted that from 310 to 320 to get to your number, which, again, I'm not saying is off the mark. But what I will say is that absolutely organically, we still believe we're doing that. We'll show that in Q1 when we come out here in a few weeks and, you know, continue to believe that sort of the worst is behind us. In terms of the ARPUs, look, you know, we are just delighted that they are stabilizing, right? And frankly, we're quite happy if they stay stable because any ongoing decline per megabyte is made up for by the use of higher and higher bandwidth in most customer use cases, right? So that's a good outcome for us, right? From a 20% price decline type place over many of the last four or five years. Could there be upside on the ARPU? Sure, I mean, there could be, right? But it will probably take us well into kind of real 5G, right, and a lot of high bandwidth usage before that will truly happen. And I wouldn't hazard to put a timeline on that per se. I continue to believe it's possible and certainly hopeful, but couldn't tell you exactly when.

Thank you. Thank you. Our next question comes from Lance Vitanza with Cowan. Please, your question.

Hey, thanks for taking the questions and congrats on the Twilio transaction. Romul, I think you mentioned that when you were putting together the guidance for 2023, did you say earlier on the call that before you layer in the Twilio component that you were sort of looking at mid to high single digit organic normalized growth rates, obviously normalized meaning despite the fact that you had the pair of $12 million revenue headwinds for 2023. Did I hear that right?

Yeah, no, that's correct. Despite the 12 of our largest customer LTE transition project and the 12 million from our 2G, 3G, we thought we could sort of fill that hole and more. And I actually went a step further on the last call, Lance, and I said, When we don't have that $24 million hole in 2024, right, we could likely near double that organic growth rate without massively improving our sales performance, right? The same top line dollars that we're putting on the company in the year when I'm not subtracting 24, if it was 5, 6, 7, 8, whatever percent it was this year, should be able to get you 10, 12, 14 the next year, right? So that was kind of, yeah, what we talked about on the Q3 call.

Yeah, I mean, that sort of implies that the normalized growth rates, you know, even through fourth quarter have been quite healthy. So I guess my question is this. How do you feel about the, just in general, the overall trajectory in the pace of IoT deployments? And maybe the way to ask the question more specifically is this. So the growth rates that you're seeing on a normalized basis are Does that sort of anticipate you taking share, or is that really just more of a barometer of what's going on in the broader market and the pace of deployments and so forth?

Yeah, no, I mean, look, I think, you know, our goal, right, Lance, as you've sort of heard from me since we first met, is to get to that sort of rule of 40, 20% top line growth company. And hey, if we can do better than the rule of 40, we will, but we certainly have been sort of chomping on the bit to invest into growth and to add the sales capabilities and so forth that we were not able to do as a private company with a ton of debt and so on. And so, one way to view the Twilio acquisition is to view it as the board supporting us to the hilt on getting to 20% EBITDA in one shot, so to speak. And I would actually argue one step further, which is it's the best investment you can make. Because again, hiring 30, 40, 50 salespeople, hoping half of them work out and they're fit with our culture. And if you can find the talent in the first place, which isn't easy, because we certainly won't lower our standards on that, is a long road to temporary. Here we get a proven group of a dozen odd sales, pre-sales folks, a group of individuals that are a team already, have good customers already. So it's fabulous, and we want to get to that 20% growth. I will tell you now, to connect it back to your question, that when we hit 20% top-line growth, that will include taking share. That will include growing businesses. kind of our win rates and the opportunities that we're seeing and probably growing faster than the market. Now, you know, the market may surprise me and growth rates may hit 20% across the various services that we count in our TAM, right? But today, you know, those markets are growing at half that or less than that, depending on the connectivity pieces, the managed services pieces, depending on which piece you're talking about. So we certainly contemplate over time getting more than our fair share.

Great. Thanks very much for taking the questions. Congrats. Bye.

Thank you.

Our next question comes from Matt Nicknam with Deutsche Bank. Please state your question.

Hey, guys. Thank you for taking the question. Congrats on the deal announcement. Just two, if I could. One on the 23 revenue guide. Maybe I'll ask the question a little bit differently, and I'm not going to ask about Twilio's contribution, but any color you can provide in terms of what you're expecting for the CAS and IoT solutions businesses, maybe within that 300 to 310 million outlook. And then maybe secondarily also, if I can ask about free cash flow, just given the bump up in interest expense, I'm just wondering if there's any expectation for any meaningful cash flow generation next year. Thanks.

Yeah, I'll set Paul up on a question he should really answer, certainly on the IoT connectivity, IoT solutions breakout and projections within the 300 to 310 type guidance. On the cash flow front, look, I mean, the nature of our senior debt is such, as you're aware, floating over what used to be LIBOR, I guess, once we go address it and at minimum amend and extend it, if not reduce it in the process. it'll be SOFR plus or whatever. But the fact is that that's expensive debt right now. And so between that and our convertible equity, which is at a much more reasonable interest rate, we're spending in the neighborhood of $40 million just servicing debt in 2023. It's just a ridiculous number. And when you then add in a little bit of extra expense on the audit revisions here, on the extra capex and sort of cash spend that we'll get once we close the Twilio IoT unit. It's certainly not going to be a good free cash flow year, right, is what I'll say. And then I'll turn it over to Paul to add color.

Yeah, so from the split really on the increase in revenue on IoT connectivity. So like we had said, low to mid single digit growth on the IoT connectivity. And then on the solution side of things, again, because we have that whole of 12 million to fill, we're looking at, again, same kind of range for that also. So if you're looking at it, it's pretty similar on both those line items. As Romo mentioned on the cash flow perspective, so we end this year around 35. For next year, I do see it going down when you include Like Romo said, the integration cost, this is, again, assuming a June 1st closing of the deal, including any of the integration costs with them, with the slightly dilutive that EBITDA that brings with Twilio. And then, like Romo said, we have some additional year audit costs in Q1, and then the gold public costs that we'll now have a full year of in 2023. versus 2022, they were kind of ramping up as the year went on. We will see the cash flow probably see about a negative two, three, four million next year.

If I could just follow up also, safe to assume, I know the margin guide is about 20% for the year, but safe to assume 2H could be a little bit lower as you get some dampening effects from the Twilio revenues coming in, at least early on?

Yeah, so the margins, from the Twilio side are less than ours, obviously. And that's where we see a lot of our opportunity to gain here. But yeah, on the connectivity side, because all the revenue will be in the connectivity revenue, you will see from a percentage basis, a little bit of a dilution from the Twilio margins in the second half.

But I would also, you know, argue about that, you know, look, I mean, especially given this macro environment, just, just kind of, you know, it's sort of smart to be a little bit conservative. It's sort of one point I'll just throw out there in terms of characterizing our guidance. The other point I would throw out there is that, you know, we had investments building in our organic business in more in H2 after we sort of made sure things were, you know, not falling through the ground in terms of this, you recession and all these macro environments, which again, we're not really seeing these signs of weakness. We feel really good about that. And we're going to protect that, right? Because just in case the deal doesn't close, we're going to absolutely protect the ability to do those investments on our own. Equally, if the deal does close, there may be a little bit of rationalization of whether all of those investments are required or not. And so we're very, very comfortable, let me say it that way, on the 20% EBITDA, and yeah, there may be some impact in H2, but they may not be as big as you're thinking, so.

That's great, that's good.

Appreciate the caller. Congrats again, thank you. Thank you.

Thank you, and we have time for one more question, and that question comes from Mehta Marshall with Morgan Stanley. Please state your question.

Great, thanks. Maybe two for me. Maybe more background on how this deal came around of, you know, how long this conversation had been happening. Did they approach you? Just anything that, any background that you could give there. And then the second question just being now that Ericsson has kind of divested their IoT platform to Eris, just any update on where that partnership stands? Thanks. Thanks.

Okay, good stuff, Mita. Let me see. I'm not sure exactly how much I am able to say slash should say about the process with Twilio. It's been a cycle. It's been a, you know, longish cycle. They have been careful in how they've made this election. Any more words on that should likely come from them, to be honest, as opposed to from me in terms of what they might be willing to share in terms of the number of parties that were involved in the process and the ups and downs and so forth that go on. We are just delighted that at the end of it all, they chose to pick us, right? I mean, their bet was us. This was the place they said is the best place for their talent, for their customers. and for the go-forward kind of journey of IoT, which obviously continues to be an important market for them. It's just not where they are strategically focused for the future, right? So in that sense, it's sort of a marriage made in heaven. We're just delighted that it's worked out the way it's worked out. What was the second part? It was the Ericsson question. Again, an excellent question. We were really bullish about that partnership. I at least haven't seen a closing announcement yet of the deal. Um, and, and, and as you might imagine, you know, between the gun jumping rules and everything else, there's not exactly a lot of conversation going on, uh, with either side, um, uh, right now about, about their plans and so forth. So I suspect post close, we'll start to get more insight into their plans. Um, Let me say this. Let me show my hand a little bit in the sense that we're definitely more cautious, right, about the situation. I mean, we were deliriously happy to take IoT Accelerator's inbound traffic, if you will, from their international customers on their international MNOs, right, when it was part of Ericsson. When it's part of arguably a competitor or sort of wannabe competitor of we're going to be cautious. We have lots of opportunities in, you know, in kind of how we develop our indirect sales channel between the AWSs and the Google Clouds. Are we going to put more of our effort on some of those, you know, as opposed to on Ericsson? It all depends on what we hear and what their proposition comes back with. And we're certainly going to be looking hard at what, if anything, may change. Now, Last thing I'll say on this slightly long-winded answer, Mita, is that, as I said, when the Ericsson Partnership announced, right, every deal had to be won one at a time. And there was going to be minimal revenue in 2023. And, in fact, in the guidance we provided, there is zero dollars in there, as I can say that confidently. So there's no risk to the numbers because of what may end up on that partnership front.

Great. Thanks so much.

Awesome.

Thank you.

Thank you. And I'll hand the floor back to management for closing remarks.

Yeah, no, thank you so much. And operator, and thank you everyone for taking the time to listen to our earnings call. We look forward to updating with you with our first quarter results in what feels like just a few scant weeks. So speak to you all soon. Have a good evening.

Thank you. And that concludes today's conference. All parties may disconnect.