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TEUM: A Building Backlog Is the Most Positive Sign in Q2 Results

By Lisa Thompson


Pareteum Corp., a provider of virtualized mobile platforms (ET Software DNA 2.0) for MNOs and MVNO operators worldwide is still recovering from the loss of its 2nd largest customer in 2015. New management has right sized the business, and brought the company to positive adjusted EBITDA. The company still has a major cash squeeze but is slowly winning new customers and is poised to return to growth.

In Q2, Pareteum (NYSE:TEUM) continued to make progress improving operations. Revenues were up sequentially 16% as it came out of a seasonally weak Q1, but flat with 2016’s quarter. The company emphasized that its biggest accomplishments were a huge increase it what it calls backlog, from $43 million in Q1 to $60 million in Q2 and reaching positive adjusted EBITDA. Its backlog is defined as a rolling 36-month sum of potential revenues based on currently signed contracts. 

The biggest piece of the increase in backlog is a deal with a financial services company in Brazil who expects to begin onboarding customers in Q4 2017. This seven-year SaaS agreement will enable the customer to provide mobile wireless services to a number of communications service providers and enterprises customers. 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. Between now, and the start of on-boarding in Q4, the company will earn fees for setting up the service. 

Q2 2017 revenues were $3.2 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 70.8% versus 70.0% a year ago and up from 69.9% in Q1 2017. Expect this margin percent to bounce around depending on product mix and costs associated with adding new customers. Operating expenses were $3.5 million versus $4.5 million last year and included restructuring charges of $459,000 in the 2017 quarter, and $205,000 in the 2016 quarter. Ex these one-time charges, expenses were reduced $1.3 million to $3.0 million this quarter. We do expect there to be another restructuring charge in Q3 2017. 

Interest expense was $406,000 versus $296,000 a year ago of which only $17,000 was paid in cash. Total other income was a loss $237,000 in 2017, aided by a currency translation gain of $433,000. Last year other income was a loss of $647,000. The net loss for Q2 2017 was $1.3 million versus a loss of $2.8 million. The EPS loss was $0.10 per share versus a loss of $0.43 per share in 2016. The primary share count increased to 12.9 million shares, almost double the 6.5 million shares in last year’s quarter. 

Given the company is running the business on EBITDA and debt concerns are the biggest issue, investors should focus on EBITDA. For the quarter the adjusted EBITDA, taking out one time restructuring costs, was a positive $463,000, versus a negative $691,000 a year ago. During the quarter the company spent $302,000 on capital expenditures. 
Q2 showed more restructuring of its balance sheet, moving debt from short-term to long-term although the total amount remained at $6.9 million. Total cash declined to $1.4 million from $2.1 million. Working capital was a negative $7.7 million down from a negative $8.7 at March quarter end. 

We are adjusting out Q3 and Q4 estimates to reflect lower than expected spending as the company tries to maintain EBITDA positive results while keeping revenues the same. All eyes are on Q4 for a successful launch in Brazil and signs of traction going forward. 


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