Urupong
KonaTel (OTCQB:KTEL) is an MVNO (Mobile Virtual Network Operator) supplier utilizing backed authorities packages to ramp subscribers for cell broadband, not in contrast to SurgePays (SURG).
While they can quickly ramp subscriber progress, this has come on the value of margins and money move, and the corporate has plunged into the purple.
Since we all know little about essential variables like CAC (buyer acquisition value), attrition price, and margins on their MVNO service, it is laborious to determine the possibilities of this turning round, however on the premise of some affordable assumptions issues do not look too promising.
So we’ll keep on with SurgePays as our most well-liked inventory on this sector.
KonaTel has two subsidiaries:
- IM Telecom, a wi-fi reseller that distributes Lifeline and EBB providers below its Infiniti Mobile model
- Apeiron Systems: CPaaS (communication platform as a service)
These produce two income sources, that’s two segments through which it reviews.
- Hosted Services, the CPaaS enterprise of Apeiron
- Mobile Services mainly, the Lifeline and ACP enterprise of IM Telecom
Growth
The firm is actually rising income, because it has launched into an in depth buyer acquisition program, which is paying off:
Q3 income grew 62.8% y/y and 15% sequentially to $5.9M, a $24M run price.
IM Telecom
Most of the expansion is coming from the cell phase within the type of new backed subscribers for the ACP and Life Line packages. The EBB program has now progressed into the ACP (Affordable Connectivity Plan), a Federal program to shut the digital hole for low-income Americans by subsidizing broadband subscriptions.
The ACP program subsidizes certified households to the tune of $30 per thirty days for broadband (together with cell broadband) subscriptions (and likewise as much as $100 in one-time subsidy for units like tablets or cellphones).
There are as much as 50M US households that might qualify for ACP subsidies with 16.7M signed up by March 17, 2023, which is 33% of those have signed updated.
We are aware of ACP by way of advantage of SurgePays which has used this system to spice up its cell broadband subscribers from 30K at the beginning of 2022 to 220K by the top of the yr so we all know quick subscriber progress is feasible right here.
We aren’t aware of the main points of the corporate’s MVNO agreements with the carriers, but when it is something just like the settlement that SurgePays has we are able to assume that they pay their carriers within the order of $15/M per subscriber for a gross revenue of $15 per subscriber for the corporate.
Of course, we additionally know that these gross income aren’t materializing immediately as the corporate incurs upfront CAC (buyer acquisition prices) and it’ll take a while earlier than it could possibly e book the income.
Then there may be the problem of attrition, which at SurgePays is round 8% per thirty days. SurgePays is lowering these attrition prices in two methods:
- It is lowering CAC by signing up new subscribers on-line and thru an 8K (now at the very least 11K) companion store community.
- It makes a one-time revenue by giving freely tablets, for which it receives a one-time $100 ACP subsidy however which value the corporate solely $75 (beforehand this was $90, however they now order straight from the producer in giant portions).
These free tablets are additionally an amazing advertising device however we assume KonaTel is not offering any units. We wish to know what their CAC is, administration did not say something greater than this (earnings PR):
Mobile buyer acquisition prices aren’t amortized over the common lifetime of the client, however are typically acknowledged at the beginning of service and usually recovered inside 120 days after activation. Mobile buyer acquisition prices for the third quarter 2022 had been $2.9 million in comparison with $283,000 for the third quarter of 2021.
But we do not know the variety of subscribers (or the rise through the quarter), the gross margin on their MVNO contracts or their attrition price all issues we now have to know earlier than we are able to make any extra exact dedication of the unit economics.
In reality, we do not even know which program (the ACP or the Lifeline program) is answerable for the majority of latest subscribers or whether or not (and if sure to what extent) their unit economics differ.
While we are able to roughly assume the gross revenue on subscribers is within the order of $15/M (just like SurgePays), two variables are essential to make the economics work, which is CAC and attrition, as they collectively decide attrition value.
If, as administration argues, it takes 120 days to earn a return on new subscribers that implies 3 or 4 months (relying on whether or not they obtain the ACP subsidy in month one), this means a CAC of $45-$60.
That’s significantly increased than these of SurgePays and it would not seem like the corporate has one-off advantages promoting tablets to compensate for the excessive CAC.
So whereas it might very properly be true that the corporate recovers the CAC in 120 days as they declare, attrition generally is a significant issue right here.
For occasion, suppose all of their $11M of Mobile income in Q3 comes from ACP, which might be $3.7M per thirty days or 120K subscribers. Gross revenue on these can be within the order of $1.85M per thirty days.
With Q3 CAC at $2.9M or practically $1M per thirty days, which ought to depart $2.55M in gross revenue for Q3, the reported gross revenue was solely $911K, which could give us a sign of the price of attrition ($1.6M for the quarter).
Or one other method, at an attrition price of 8% per thirty days and an attrition value of $45 (CAC minus the gross margin on the subscription price), that is $432K per thirty days or $1.3M for the quarter which is shut sufficient to our earlier calculation to have some confidence in these figures.
As argued above, SurgePays is lowering these attrition prices by lowering CAC itself (by way of signing new prospects up by way of their companion retailers) in addition to offsetting them by one-time income on the tablets, however does KonaTel have methods to take care of attrition prices? We do not know.
Hosted Services
While Mobile Services is answerable for all income progress, their Hosted Services (the corporate’s CPaaS enterprise) obtained a shot within the arm from the US Prison System (Q3 earnings PR):
We not too long ago executed a brand new three-year extension with one among our largest cloud providers prospects that doubles their month-to-month minimal income dedication. Under the phrases of the brand new contract, which has a minimal worth of $7.2 million over the time period, we’ll proceed to supply our nationwide cloud communications platform to assist their community, which supplies inmate communications providers to prisons throughout the United States.
Financials
There is a break up out in phase income from the 10-Q:
KTEL 10-Q
And for comparability, the identical figures from 2021:
KTEL 10-Q
Mobile service income elevated by 143.0% in Q3 whereas Hosted Services income declined by 4.1%, so some issues grow to be immediately clear:
- All income progress comes from the Mobile Services phase
- This progress comes at the price of gross income.
There has been a notable collapse in gross revenue and gross revenue margins:
And it isn’t solely COGS which might be rising, taking a toll on gross revenue and margins, CG&A is rising as properly with a view to join the brand new prospects and assist them:
No shock that is taking a toll on the corporate’s money move:
Accelerating new subscriber progress has turned mildly constructive money move into vital adverse money move and since we all know little about their CAC, attrition price, and attrition value, we will not be certain it will flip round.
It can flip round after they cease the intensive new subscriber drive, however then attrition will slowly reverse their subscriber progress.
Balance sheet
The firm had $2.24M in money and $3M in debt (10-Q):
On June 14, 2022, the Company and its wholly owned subsidiary firms entered right into a Note Purchase Agreement and associated Guarantee and Security Agreement with CCUR Holdings, Inc. (as collateral agent), and Symbolic Logic, Inc., whereby the Company pledged its belongings to safe $3,150,000 in debt financing. The time period is for a interval of twelve (12) months, at an rate of interest of 15%, with two successive six-month elective extensions. As a situation of securing the mortgage, the Company paid a 3% origination price, and different authorized and shutting bills, within the quantity of $153,284, leading to a web mortgage stability of $2,984,181. The mortgage prices of $153,284 and the web mortgage stability of $2,984,181 are to be amortized over a 12-month interval.
So their stability sheet scenario is not too snug, the debt is all present, pays a excessive (15%) rate of interest and they’re bleeding fairly a little bit of operational money as properly.
Valuation
The firm has 4.43M choices excellent, 1.93M of that are vested and exercisable so a completely diluted share depend of 44.2M. At $0.7 a share that is a $31M market cap and supplied FY22 gross sales are within the order of $23M, the shares promote at roughly 1.35x FY22 EV/S.
Conclusion
The firm is efficiently ramping up subscriber progress, which takes a substantial funding therefore the steep fall in gross margin and the rise in SG&A.
Management argues that this funding has a return of simply 4 months, and whereas that factors to a comparatively excessive CAC, we assume that is right, it isn’t the entire story.
We wish to know their subscriber numbers, attrition price and CAC, though making some assumptions based mostly on one other firm (SurgePays) the attrition price will probably be within the order of 8% per thirty days and the attrition value will probably be substantial and rising with the variety of subscribers.
We wish to know whether or not they have tips up their sleeve like SurgePays, which has lowered CAC and by shopping for tablets in bulk and making a considerable revenue on these, offsetting a lot of the CAC (and therefore attrition value).
If KonaTel can do one thing comparable, they might have a viable enterprise mannequin, but when they’re caught with a excessive CAC, and excessive attrition with out means to decrease or offset these, the economics are far more troublesome.
Editor’s Note: This article discusses a number of securities that don’t commerce on a significant U.S. change. Please pay attention to the dangers related to these shares.
