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Pareteum (TEUM) Raises Equity To Complete Turnaround As Backlog Builds

11/15/2017
By Lisa Thompson

NASDAQ:TEUM

Since the loss of Iusacell as a customer in 2015, Pareteum (NASDAQ:TEUM) has been run on a shoestring as the company struggled to right size itself and bring costs in line with current revenues. Having done that, the company was finally able to raise capital in an equity offering as its prospects have brightened with a record backlog of new customers. On November 9, 2017, Pareteum sold 9,009,478 shares of common stock, 4,034 shares of preferred stock (each of which shares is an equivalent of 1,000 shares of common stock), and five-year warrants to purchase up to 7,478,228 shares of common stock exercisable at $1.05 per warrant. The offering was priced at $0.92 per share of common stock and $920.00 per share of preferred stock. The Company received net proceeds from the offering of approximately $10.7 million, after deducting the applicable underwriting discount and estimated offering expenses payable by the Company. At the end of September, the company had $7.2 million in total debt, and negative working capital of $7.8 million. This cash infusion combined with another 1.5 million share of common sold on October 10, 2017 for $1.05 netting $1.4 million, pushed working capital up to $7.6 million and the quick ratio up to 1.7. The company believes it now has enough capital to reach operating break even and has dry powder for any acquisition opportunities.

Q3 Revenues and Backlog


Q3 revenues showed a slight sign of life, growing both sequentially and year over year. For the quarter the company reported revenue of $3.5 million versus $3.2 million last year and $3.2 million last quarter. More importantly the company announced its backlog (which it defines and a rolling 36-month sum of potential revenues based on currently signed contracts,) is at an all time high and ramped significantly in October. At the end of June the backlog was $60 million, at the end of September $94 million and the end of October $114 million. Outside of revenues from its biggest customer Vodafone, the major drivers of revenue in 2018 are expected to be the Brazilian customer added in Q2, the deal with an Eastern European company announced in September, and a new customer expected to be announced in this Q4 2017 quarter.
 
The customer in Brazil expects to begin onboarding customers this quarter. This seven-year SaaS agreement will enable the customer to provide mobile wireless services to a number of communications service providers and enterprises. This customer plans to use the platform for both communications and Internet of Things (IoT) applications. The Brazilian company's management believes it can reach a minimum of 3 million subscribers and supported connected devices within three years, and generate revenue in the 8-figure range. We will likely see meaningful revenues from this in 2018. Before the start of on boarding, Pareteum will book fees for setting up the service. 

Another new large customer is expected to be an Eastern European telecom company with broad holdings in the telecommunications, broadcasting, real estate, and industrial markets. Pareteum signed a five-year agreement to provide its Managed Services Platform to this customer. This telco will be able to provide wireless services to existing and new Mobile Virtual Network Operators (MVNOs) in its market who will serve consumers and businesses with mobile services as well as Internet of Things (IoT) devices. This customer is On-boarding is expected to begin at the beginning of Q2 2018. This customer currently has 2 million subscribers. Pareteum expects this telco to generate approximately $24 million in revenues for Pareteum over the first three years, and has stated it expects the five-year value of the contract to possibly be $48 million. 

Q3 Results

Q3 2017 revenues were $3.5 million versus $3.3 million a year ago. The two largest customers were 96.5% of sales and 90.2% of revenues came from Europe. Vodafone Spain is still the vast majority of sales.
Gross margins increased to 77.4% versus 71.9% a year ago and up from 70.8% in Q1 2017. Expect this margin percent to bounce around depending on product mix and costs associated with adding new customers. As new customers are on boarded in Q4 we expect gross margin to be down sequentially.

Operating expenses were $4.2 million versus $11.1 million last year and included one-time charges of $253,000 in the 2017 quarter, and $6.4 million in the 2016 quarter. Ex these one-time charges, expenses were reduced $818,000 to $3.9 million this quarter. 

Interest expense was $421,000 versus $254,000 a year ago. In the quarter $570,000 in interest was paid in cash. 

Total other income was a loss $694,000 in 2017. Last year other income was a loss of $4.2 million. The net loss for Q2 2017 was $2.3 million versus a loss of $13.5 million.

The EPS loss was $0.16 per share versus a loss of $1.97 per share in 2016. The primary share count increased to 14.3 million shares, more than double the 6.6 million shares in last year’s quarter. 

Given the company is running the business on EBITDA, investors should focus on that metric. For the quarter the adjusted EBITDA, taking out one time restructuring costs, was a positive $603,000, versus a negative $1.4 million a year ago. During the quarter the company spent $206,000 on capital expenditures. 

We are adjusting our Q4 revenue estimate upwards to $3.8 million reflecting the company’s guidance that it should exit the year at a $15 million run rate. We are also increasing the share count to reflect the recent capital raises. The 2017 estimate is now for $13.3 million in revenue and a loss of $0.47 per share. For 2018 we are keeping revenues at $16 million and decreasing the loss per share to $0.25 because of the increase in shares. With the large backlog ramping throughout 2017, investors await accelerating results going forward. 

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