KTEL Q3 2022

Profitability on the horizon?

There’s been a lot of confusion about KTEL’s earnings the past couple quarters. Here’s how I see it.

KTEL must strike a delicate balance between managing rapid growth available in the Affordable Connectivity Program land grab, managing churn among customers, growing/managing churn without blowing out the cap structure (SURG $100M shelf), and communicating to investors that gross profit is temporarily lower as they grow due to customer acquisition costs being realized at at once.

This entire year management indicated they wanted to grow rapidly and then focus on being profitable. The messaging has been remarkably consistent: 

Q1: "We believe the long-term economics of our business are highly attractive and will result in increasing profitability and cash flow beyond this current period of substantial growth."

Q2: “We expect our margins to improve through the remainder of this year and into next year as we begin to recover customer acquisition costs that were incurred at the start of our growth cycle.”

Q3: “As previously discussed, the investment in our accelerated growth plan put pressure on our margins over the last two quarters as costs to acquire new customers are generally expensed at the start of service; however, the initiatives we are taking today are setting ourselves up for sustained profitable growth.”

The growth is better than it appears. The headline numbers of 62.8% revenue growth year-over-year includes their CPaaS platform that was (until this quarter) in a slight, slow decline. The Mobile Services segment earned more revenue in Q3 2022 than it did during the 9 month period for 2021.  

I have viewed inventory, however erroneously on my part, as a leading indicator of next quarter’s growth for the mobile services segment. Q3 inventory levels were the lowest in the past year. The inventory decrease and increase in gross profit during Q3 has me thinking that KTEL is now at a large enough subscriber base where it makes sense to pull back on growth a little to focus instead on cash generation and managing churn among customers.

Misc. thoughts: 

• In the Q3 press release, it was disclosed that customer acquisition costs for Mobile Services were $2.9M for the quarter. Using the average subsidy of $45 disclosed on a call and 120 day payback time, that means they lit up ~21,000 lines in Q3. 

• One of the ongoing things I monitor is the payroll & related expenses. This took a significant jump in Q1 with the hiring of additional highly qualified management members. Sean said it would not increase significantly from there, and it hasn’t.

• Apeiron (the forgotten about CPaaS business) has a new $7.2M contract with their largest customer that doubles the monthly minimums over a 3-year period. 

• The $3M loan is due in June but has two optional 6 month extensions as long as interest payments continue to be made. 

• At some point it would be great if management would share their subscriber number with investors. They did only once in Q1 and from there it has been a black box.