Pareteum: Record Backlog And Increased Revenue Guidance
Aug. 28, 2018 11:59 AM ET|
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About: Pareteum Corporation (TEUM)
JD Henning
Value, momentum, portfolio strategy, investment advisor
Marketplace
Value & Momentum Breakouts
(5,302 followers)
Summary
Company boasts a 393% increase in contractual revenue backlog.
Strategic partnerships with iPass and takeover of Artilium.
Revenue outlook increased to higher than 80% year over year in the latest Q2 guidance.
Q2 delivers first positive quarterly EPS since at least Q2 2016.
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Introduction
Every stock has a story. Pareteum (TEUM) is no different. I have decided to write this brief financial synopsis in a different format than I typically do as a certified fraud examiner, anti-money laundering specialist, and PhD/MBA in finance. Instead, I will use various random concerns quoted from public message boards on financial websites and provide a brief narrative with the company financial statements, news releases, and corporate presentations. In full disclosure, I don't currently own the stock, but it has turned up previously in my Weekly Breakout Portfolio selections and members of my service are still very interested in this company.
In the world of messaging, hype abounds. The analysis I offer here just takes my general approach to financial investments that, "nothing is quite as good as it seems, or as bad as it first appears."
Corporate Summary
Pareteum describes the company this way from the material on their website: Pareteum is expressly focused on global connectivity with any device, any network, and anywhere. Clearly, an enormous undertaking for any company. They offer eight mission statements as their defining objectives and post them prominently on their website:
Fundamentally, the company is described by financial websites as:
Pareteum Corporation, formerly Elephant Talk Communications Corporation, develops Communications Cloud Services Platform. The Company provides mobility, messaging and security services and applications, with a single-sign-on, application program interface (API) and software development suite. Its platform hosts integrated information technology (IT)/Back Office and Core Network functionality for mobile network operators, and for enterprises to implement and leverage mobile communications solutions on a outsourced Software as a Service, Platform as a Service and/or Infrastructure as a Service basis: Made available either as an on-premise solution or as a hosted service in the Cloud depending on the needs of its customers. It also delivers an Operational Support System (OSS) for channel partners, with APIs for integration with third-party systems, workflows for complex application orchestration, customer support with branded portals and plug-ins for a multitude of other applications.
A recent technical chart of the stock price looks like this:
The stock price has tested the 3.25/share resistance (pink) line several times over the past year and is currently building a base along the positive trending support (blue) line for about the fifth time this year. The trend for the stock remains positive, and from a technical viewpoint another retest of the price resistance line at 3.25/share seems highly likely.
Pareteum The Narrative
So now the interesting part. Where should this firm be valued and what messages should we believe about Parateum? One of the first messages we see prominently posted among many company PR updates is this catchy news bullet that certainly caught my attention:
393% Increase In Contractual Revenue Backlog
Pareteum has added $46 million to its 36MCRB with ten (10) new customer agreements the last 36 days. Achieving this tremendous milestone represents a 393% increase from a year earlier, when in July 2017, our 36MCRB was $61 million. - Source
Their recent corporate presentation highlights similar backlog information this way:
By my count there is an unusually high 31 PR announcements, media articles, and updates just since June 1, 2018. Most companies I review have fewer than 10 news updates in the same period. The overwhelming number of news updates relates in some form to Pareteum obtaining a new multimillion-dollar agreement with a new provider in a distant location looking for "mobile enablement solutions."
Equally noticeable is that popular message boards are replete with counter-messaging casting doubt on so much PR messaging:
So let's take a closer look behind the messaging and see what might be going on here.
A sample of the rapidly growing backlog announcements shown below from the past six months gives you some perspective. Are these just loose agreements or real contracts? Is this guaranteed revenue or just PR announcements? Ultimately, these questions boil down to what William F wondered on the message board: "How come all the press releases do nothing for the share price?"
Aug-21-18 Pareteum Wins TMC 2018 Communications Solutions Product of the Year Award PR Newswire
Aug-16-18 Pareteum Awarded $4 Million Agreement for Southeast Asia National Mobile Operator PR Newswire
Aug-14-18 Pareteum Awarded $3.5 Million Agreement by British Multinational Conglomerate PR Newswire
Aug-09-18 Pareteum Secures $4 Million Contract with Eastern European-Based Broadband Provider PR Newswire
Aug-07-18 Pareteum Awarded $8 Million 3-Year Agreement by US Mobile Marketer PR Newswire -7.82%
Aug-02-18 Pareteum Attains $300 Million Milestone in 36-Month Contractual Revenue Backlog PR Newswire
Aug-02-18 Pareteum Awarded $4 Million 3-Year Agreement by Internet of Things Provider PR Newswire
Aug-01-18 Pareteum Awarded $3 Million Agreement from US Service Provider PR Newswire
Jul-31-18 Pareteum Awarded $5.5 Million 3 Year Agreement in United Kingdom PR Newswire
Jul-26-18 Pareteum Awarded New $3.5 Million 3-Year Contract Extension in Brazil PR Newswire
Jul-25-18 Pareteum Awarded $3 Million 5-Year Contract in North Africa PR Newswire
Jul-24-18 Pareteum Awarded $5 Million Contract from Singapore-Based Mobile Solutions Company PR Newswire +6.64%
Jul-19-18 Pareteum Signs $2 Million Agreement with US Wireless Internet Services Provider PR Newswire +6.69%
Jul-18-18 Pareteum Awarded $10 Million Contract From Asian Mobile And Cryptocurrency Enterprise PR Newswire
Jul-16-18 Pareteum Awarded $4 Million Contract by Tier 1 Asia-Pacific Network Operator PR Newswire
Jul-11-18 Pareteum Awarded $6 Million Contract from Asia Service Provider PR Newswire
Jun-28-18 Pareteum Secures a Total of $55 Million in New Contracts in the Second Quarter of 2018 PR Newswire
Jun-28-18 Pareteum Awarded $3.5 Million Contract from Mobile Service Provider PR Newswire
Jun-11-18 Pareteum Awarded $6 Million Contract from Established Mobile Virtual Network Operator PR Newswire +5.15%
May-21-18 Pareteum Announces $8 Million 3-Year Agreement for Global Mobility Services PR Newswire
May-21-18 Pareteum Adds $3 Million Global Cloud Services Contract PR Newswire
May-16-18 Pareteum Awarded $2 Million Agreement for WiFi Services PR Newswire
May-16-18 Pareteum Awarded $5 Million Contract from India-Based Telecom Company PR Newswire
May-08-18 Pareteum Awarded $4 Million Contract from Diversified Enterprise in Asia PR Newswire +6.83%
May-01-18 Pareteum Expands into China with $1 Million Contract Extension with Existing India-Based Mobile Travel Client PR Newswire
Apr-30-18 Pareteum awarded $6 Million Global Cloud Agreement Supporting Internet of Things Services PR Newswire
Apr-26-18 Pareteum Awarded 3-Year $2.5 Million Agreement PR Newswire
Apr-18-18 Pareteum Awarded 3-Year $10 Million Contract in the Indian Subcontinent PR Newswire
Apr-12-18 Pareteum Awarded $1 Million 3-year Global Cloud Agreement PR Newswire
Apr-03-18 Pareteum Awarded $3.1 Million South Asian Communications Services Provider Agreement PR Newswire
Apr-02-18 TEUM: Pareteum Enters 2018 With $200m Contract Backlog and Cash Zacks Small Cap Research -7.79%
Apr-02-18 Pareteum Expands Contract with Leading Global Tourism Retailer as it Enters New Markets with Additional $1.5 Million Contract PR Newswire
Apr-02-18 Pareteum Awarded $15 Million Service Contract Over 5 Years with Multi-Country African Mobile Virtual Network Operator PR Newswire
Mar-19-18 Pareteum Awarded $2.4 Million Contract from Established Global Mobile Operator PR Newswire
Mar-15-18 Pareteum Awarded $1.5 Million Contract by California Communications Platform as a Service Provider PR Newswire
Mar-08-18 Pareteum Enters Mexican Market in a 5 Year $4.5 Million MVNO Agreement PR Newswire
Feb-28-18 Pareteum Awarded $10 Million Contract from Established Carrier to Launch a Global MVNO PR Newswire +14.00%
Feb-26-18 Pareteum's Global Cloud Platform Receives 2018 Internet Telephony Product of the Year Award PR Newswire
Feb-23-18 Pareteum Awarded $1.4 Million Contract in Asia-Based Digital Online Marketplace PR Newswire
Feb-14-18 Pareteum Awarded $1.5 Million Connected Home and Office Project in United Kingdom PR Newswire +7.81%
Other message board posters like ClosedTruth imply that these announcements may be inflated contractual projections with only a very small fraction that will materialize as revenue:
So what is the right context we should use to view the progress on these contracts/agreements? Is the truth hidden in the fine print?
The metric used for the Pareteum backlog window is 36 months as shown in the tables below through 2020. A contract landed yesterday may have 90% of the deal materializing in 2019 or later with a small potential fraction of the revenue recognized for 2018. While I don't see a $12 million Cambodia contract listed above in the recent press releases, the process of measuring and booking a stream of revenue could easily involve $80,000 for 2018 and the remaining $12 million realized through 2020.
Frankly, none of the announcements by themselves are particularly bearish or bullish, but each serves to complete a larger story.
First, we need to better understand how Pareteum defines their language and categorizes the 36-month revenue backlog in their recent corporate presentation.
As the slide title explains, this is the Cloud Delivered Services & Monthly Recurring Revenue (MRR). The accompanying oral presentation was not reviewed in the writing of this brief narrative, but clearly, there are planned $ conversions and planned # connections they are tracking as key metrics. The contractual revenue backlog conversion bar charts show an increase to 106% in Q2 from 103% in Q1 even when the Q2 total planned and actual conversions are substantially higher than all the previous quarters back to Q2 2017. The stream of contracted revenue from the monthly streams falls into two categories: "Live and In Service" customer backlog and backlog that is "In Deployment and Service Establishment." Both of these streams are growing exponentially.
It is correct and helpful to picture these deals as overlapping recurring revenue deals. Call them agreements or contracts, but they are a form of future commitment to deliver revenue on a recurring basis, in a stream. As I understand it, some of the backlog are agreements with planned conversion and some of the contracts are extensions on previous deals with actual prior conversions. The net effect is that both streams of the total revenue backlog metric are increasing at substantially high rates. It's also noteworthy to see that both the "Total $ Conversion" and the "Total # of Connections" are growing significantly over the last five quarters.
So, "how come all the press releases do nothing for the share price?" Well, that is a much more complicated question than it may seem at first. Share price is affected by a large number of variables well beyond backlog, revenue growth, and earnings.
Are the shares getting diluted and is everyone getting lied to?
Messages across the boards imply that some deceptive dilution scheme is underway with Pareteum stock.
Presumably some of the grief on the message boards relates to a private placement offering that closed December 5, 2017. That's already in the books and accounted for in the statement of cash flows, besides not being a significant source of price dilution to pay the exercised warrants.
an aggregate of 7,151,146 shares of common stock issued and/or issuable upon the exercise of warrants (the “Warrants”) issued to the investors in the Company’s private placement offering which closed December 5, 2017 (the “Offering”).
More significantly, Pareteum is increasing the number of shares outstanding, even as the revenue and earnings are increasing. As I remind many people who find public offerings suspicious activity in some way, all of these public companies chose to be listed publicly in order to use share issuance as a source of funding for their growth objectives. It's neither suspicious nor surprising that the vast majority of public companies offer shares to raise capital, acquire other companies, or attract key leadership instead of borrowing from a bank for long-term debt.
However, management always needs to find the right balance of issuing shares in order to grow share price for sustained future growth initiatives without losing long-term investor interest and support that would hurt the stock share price.
The stock chart below illustrates both the last year and a half of share price behavior and also the steady rate of increase in shares outstanding (blue line). Currently, according to this data the number of share outstanding now exceeds 60 million.
Is this too much dilution? Are too many shares being issued? An excellent and very simple way to assess this balance between issuing shares and generating return for investors is to look at the earnings per share growth:
Clearly, through FY 2018 Q2 the earnings per share show the first positive earnings in more than two years. If investors liked the share price when earnings per share was negative, how much more will investors appreciate the latest positive earnings return per share in more than nine quarters?
What else is going on that affects share price value?
Pareteum illustrates the acquisition of Artilium in this perspective on their corporate slide showing multi-billion subscription potential through 2022.
The media coverage details the takeover in this form:
MVNE Pareteum, the former Elephant Talk, takes over its peer and provider of private LTE networks and IoT-enabler Artilium.
Last year, Pareteum and Artilium already formed an official partnership and in the month of April, the cloud platforms of both specialists were already combined. The main reason for the acquisition is for both companies to expand new customers with an enlarged product portfolio, the ability to earn more from existing customers through cross- and upsell and the creation of a larger platform through which the company can enter new markets.
Details
Before the acquisition, Pareteum paid an amount of $104.7 million. After the takeover, the current CEO of Artiium Bart Weijermars will become the new CEO of the entire subsidiaries of Pareteum, Pareteum Europe and Artilium. The transaction is expected to be completed in the month of September.
Supporting filings with the SEC show slightly different values, but all in the same ballpark as the media coverage.
SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(4) Proposed maximum aggregate value of transaction: $88,227,937
Pareteum Corporation - and - Artilium Plc Co-operation Agreement
How to properly value this acquisition is a much more complicated undertaking than I intended to delve into for this highlight article. Nevertheless, we can take advantage of the coverage by three analysts and the growing number of institutions investing in the firm to solidify some of our own investment perspectives. Assessing the valuation of the firm is saved for the end.
Where is all the cash coming from?
The message boards also are full of cash questions and solvency posts that can be easily answered in a number of ways.
One of the best places to start to answer cash questions is the Statement of Cash Flows as filed in the quarterly filings with the SEC called the 10-Q:
Another view of the same statement of cash flows from a financial website helps illustrate more clearly below.
Cash for the company over the past six months ended June 30, 2018, comes primarily from Financing Activities through the exercise of warrants and options ($3 million) and gross proceeds from public offering ($6.1 million). It's also important to note that in the Operating Activities the cash flow from Net Income before extraordinary items has become positive and is now a contributing source of cash flow for the first time in many quarters:
Operating Activities
Financing Activities
Cash flow from Investing Activities remains a net outflow and relates to the purchase of P&E and capitalized software up to $1.8M in the last six months compared to $332,630 in the same six months for 2017.
Concerns about cash flow typically relate to solvency questions. Another way to assess bankruptcy/solvency risk is by using algorithms from peer-reviewed financial research that test for exactly those issues. In many of my portfolios I apply these algorithms including the Ohlson O-Score probability percentage as another way to check the going concern of a company.
In this particular case, the Ohlson O-Score probability for Pareteum bankruptcy over the next two years is at an extremely low 8.23% probability. Generally firms with more than 50% O-Score probabilities begin to be considered at risk by this model.
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Company Overview • August 6, 2018 Global Software Defined Cloud Cloud ConnectivityContent
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Pareteum-Company-Overview-August-7-2018-Final.pdf
Other developments
Awards
2018 Communications Solutions Product of the Year Award from TMC
Added to the Russell Microcap Index
Pareteum Set to Join Russell Microcap® Index
Valuation Estimates
So based on these results what should the firm be valued at? We can see that revenue is increasing, revenue backlog is increasing, quarterly earnings are positive and increasing, share dilution is increasing, acquisitions are occurring, and P&E expenditure is rising. Which part of this value equation matters most?
What do the analysts say?
Only three analysts currently cover TEUM and all three have a current consensus recommendation of Outperform on the stock:
What does the investment flow of institutional investors tell us?
From the latest report at fintel.io posted below:
Institutional Owners 32
Institutional Shares 12,028,436 - 19.96%
Common Shares Outstanding 60,263,228 shares (as of 2018-06-30)
Comparing these institutional investment numbers with the Nasdaq.com website which appears to show Q1 institutional ownership:
There's clearly a substantial increase in institutional holdings up from 8.72% to 19.96% of the shares outstanding. This growth is also depicted in the graph below that shows Institutional Ownership from 2015 through 2018.
I don't see any basis for institutions to own more than 50% of the shares after the Artilium deal is completed in September, but the growth rate and institutional ownership does appear substantial. Again there also is no reason that institutions could not eventually own more than 50% of the outstanding shares of TEUM.
So where do we value the price of this stock?
Pareteum management values the stock like this:
Naturally, management sees their firm grossly undervalued using standard revenue multiples of their industry, undervalued using the revenue backlog multiples of their industry, and profit growth ranges for their industry.
Every company is certainly in a better position to know the quality of their agreements and revenue forecasts. Whether we trust those results is an entirely different valuation question.
When it comes to valuation of share price, I personally take the oversimplified approach that the first positive EPS in at least nine quarterly results is worth considerably more to me than all the prior negative EPS. Further, the institutional investment accumulation gives me peace of mind that more than 30 PR announcements and awards in the last few months that I've never heard of or don't fully understand have enough basis to attract institutional investment.
If I journey back nine quarters when EPS was still negative and revenues were considerably lower than they are today, it puts me in the range of $6/share for a much less attractive company back then than what Pareteum has become today.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
https://seekingalpha.com/article/4202542-pareteum-record-backlog-increased-revenue-guidance
