There is a small cap stock I am watching closely as the company has three solutions that solve a problem for Mobile Network Operators (MNOs) and Mobile Virtual Network Operators (MVNOs). The global mobile operator market is a sizable market of $20 billion and is transitioning to cloud software across many geographies. The United States and China tend to be the center of attention, yet there is ample opportunity in other markets, such as India, Brazil and throughout Europe. Due to triple-digit sales growth driven by these Tier 2 telecom markets, the small cap company Pareteum (TEUM) has seen recent movement in its stock price from $3.00 per share in mid-February to $5.70 at its peak March 18th to a correction of $4.88 on March 21st.
Problem that Pareteum solves:
Globally, mobile network operators are not the Verizon and AT&T duopoly we see in the United States. The majority of global mobile operators and mobile virtual network operators struggle with the following:
- Mobile core network technologies: when their subscribers roam, they have to pay other mobile operators requiring routing and network intelligence, including control flow access across radio access networks.
- Business and operations support systems (B/OSS): Internal billing systems that would be more flexible and cost effective as software-as-a-service (SaaS).
- Communications-centric CRM: customer and administrator help through SaaS.
- Lack of last mile connectivity, like WiFi hotspots and the ability to connect to the best network available.
- Data analytics to understand a user’s activity based on location.
Those are a few of the bullet points of what Pareteum’s managed services platform and global mobility cloud platform solves. Like most cloud software offerings, the benefit for customers is the time it saves by not developing the required solutions in-house, and the cost it saves as the cloud software scales to provide only what the mobile network operator or mobile virtual network operator needs during the month or year of service.
Examples of this include Twilio, which provides the VoIP and messaging for applications so the developers do not have to develop in-house. Another example is SalesForce, which provided the CRM software for sales teams. Pareteum provides solutions for Tier 2 telecom companies to continue coverage when their users roam, plus the company helps these medium sized telecom companies with internal reports and user information. Vodafone is one of their biggest customers.
In many cases, such as last mile connectivity, the MVNO does not have the capability to connect without a platform like Pareteum (notably, Pareteum acquired iPass to expand solutions for last mile connectivity).
Mobile Virtual Network Operators are more aggressive in adopting communications software-as-a-service (CSaaS) while Tier 1 Mobile Network Operators are not shifting to cloud services yet, and instead, are continuing to rely on their on-premise servers. Therefore, MVNOs are Pareteum’s core clientele.
According to GSMA Intelligence, there are 920 MVNOs and 260 MNO sub-brands totaling 1,250 service providers worldwide hosted by MNOs. The MVNO market size will be $73.2 billion by 2020, according to Grand View Research. The total addressable market for the on-premise software category is $20 billion annually. According to Northland Capital Market, the addressable market is under 10% penetration by the SaaS model.
Estimates and Valuation
Total revenue last year was $32.4 million. The company reported $14 million in revenue from the most recent quarter Q4 2018 up from $8 million in Q3 2018 and $6 million in Q2 2018. The prior two quarters reported $4 million in revenue.
Pareteum expects revenue to be between $105 million and $115 million for the full year of 2019 in the range of 225% to 260% year-over-year. Northland Capital Markets, who initiated a position in December of 2018, anticipated FY2019 revenue of $75.9 million without the acquisition of iPass. With the most recent acquisition, Northland placed estimates for Pareteum at $114 million for FY2019 and $146 million for FY 2020.
The company is also expecting 2019 revenue growth in the range of 225% to 260% year-over-year, "outpacing the market growth rate fivefold to be updated quarterly." Recently, the company announced $615 million for its 36-month contractual backlog, up from $403 million the previous quarter. The company has been adding $10 million in annual contract value (ACV) every quarter (ACV is an important cloud software metric). Adjusted EBITDA in 2018 was at $6.4 million and the company ended the year with a $6 million cash balance and no debt. The company is not profitable with net income at -$13 million in 2018 and -$8 million net operating cash flow.
The company went through a major restructuring that placed Hal Turner as the principal executive officer in November of 2015. During 2018, the team won 90+ deals. However, the team had won no new deals in the prior 3.5 years. Hal Turner founded Turner Telecom Holdings Group, and has experience in the telecom industry with senior positions at AT&T, was President and COO of BellSouth, CEO of Pac-West and various positions at Panterra Networks and Telecom Netherlands. He has also held high ranks across many startups and corporate firms in the telecom space. The majority of the senior management was hired under Hal Turner in 2016 and includes more experience in the telecom space and cloud-based data and telephony.
Pareteum acquired Artilium on October 1stto provide more depth in core areas and expand European network coverage. Pareteum acquired iPass in February 2019 which will provide Pareteum with a global WIFI network with 68 million hotspots. This will also add approximately 50 software developers to the team to help Pareteum fill backlog contracts. Artilium will be 28% of revenue in FY2019 and iPass an estimated $38 million in revenue of the projected $114 million in FY2019.
Competition & Risks
- The primary competitors are private companies Plintron, Effortel and i-New. These companies do well within their respective areas, and are a risk to Pareteum.
- Effortel:Mobile Virtual Network Enabler provides end-to-end service for Mobile Virutal Network Operators. Vodafone Malta, Equital Kenya, and operators in Italy, and Belgium are customers.
- I-New:Offers B2B customers full-service tech platform to operate a Mobile Virtual Network operator. Customers include Virgin Mobile, Saturn Mobile, Flash mobile and about a dozen others.
- Plintron:Mulit-country Cloud Communications-as-a-Service (CSaaS) and a Virtual Network Operator that offers cloud communications. Customers include Vodafone, Telefonica, Orange, and Telenor.
- Vodafone is an early adopter of Pareteum due to the cost and time benefits of using SaaS to scale the internal billing processes. In 2017, Vodafone represented 80% of Pareteum’s revenue, in 2018 Vodafone represented 48% of revenue and for FY2019 the estimate is Vodafone will represent 20% of revenue.
- Similar to the previous risk noted, the majority of the annual contracts are new and an investment now in this company requires speculating the 50-80% new contracts and customers will have a low churn rate (the company says 0.1% but sales history is too new to know churn).
- There is notable volatility with this stock. The day I wrote this article the stock price dropped 12% from its all-time high of $5.90 following a rise from their most recent earnings on March 12thfrom $3.91. Today it is down 5.31% to $4.88. I plan to initiate a position if/when the stock is in the $3.00-$3.50 range.