Kaleyra: The Global Chase Of Digitalization Is The Key To Growth (NYSE:KLR)

Investment Thesis

Global digitalization is changing the way businesses operate and communicate with customers, and companies that can adapt to this trend are well-positioned to succeed in the modern market. Kaleyra, Inc. (NYSE:KLR), a communications platform as a service [CPaaS] business, has a strong reputation in the industry and is well-suited to navigate this shift due to its focus on digital communication services. The CPaaS market is expected to have a high CAGR in the next 5-10 years, making it an attractive industry for investment. Additionally, the restoration of European parity will contribute to the stability of the company’s market value, further positioning it for success in the digital age.

An Overview Of Kaleyra

Kaleyra, Inc. is a company that provides a cloud communications platform for enterprises worldwide. Its platform integrates software services and applications that enable mobile first interactive end-user customer communications. Kaleyra, Inc. provides mobile messaging services for financial institutions and various other types of enterprises and customers. The company was founded in 1999 and is headquartered in Milan, Italy.

So basically, Kaleyra is a CPaaS company that offers a lot of communications services through internet telephone such as SMS, Voice, WhatsApp, Chatbots, and more. Kaleyra’s in a very big market, and with $1 trillion spending in digital transformation in 2021 (expected to grow to $3.4 trillion in 2026), being well-positioned this early on will be a great advantage towards future growth potentials.

To illustrate my point on why Kaleyra can perform well in the future is if it exercises these factors (the more the better):

Strong Product Offering – A CPaaS business that offers a high-quality, reliable, and feature-rich platform is more likely to be successful. Kaleyra has a wide variety of products ranging from SMS, Voice, WhatsApp, Push Notifications, E-Mail, and Video. For businesses, Kaleyra has tools such as a Flow Builder, Contact Center, Chatbots (which I personally think helps businesses a lot to have an automated response for answering generic FAQs), Campaign Management and more.

Strong Customer Relationships – Building strong relationships with customers and providing excellent customer service can be crucial for the success of a CPaaS business. Just recently, the company secured a partnership with Fincons Group to transform digital collaboration in banking. Acquiring more customers will help Kaleyra succeed in its industry.

Scalability – The ability to scale the platform to meet the needs of a growing customer base is important for a successful CPaaS business. Since Kaleyra has a lot of product offerings and tools, the company is easily scalable. As an example, businesses require a lot of tools to make it easier for them to connect with their clients; Kaleyra can improve its tech through APIs (Application Programming Interfaces). According to Dario Calogero, Kaleyra’s CEO:

In addition, we reached a key milestone with one of our existing partners in the third quarter, Google Verified Calls. We crossed 20 million Google Verified calls managed through Kaleyra Voice API in 2022 with 10 million of those calls managed in August alone.

– Dario Calogero on Kaleyra’s Q3’22 Earnings Call

This proves that Kaleyra is a scalable company with products and tools that can attract a large customer base. More customers mean more revenue for Kaleyra.

Flexibility – A platform that is flexible and can be easily customized and integrated with other systems and processes is more likely to be successful. Again, with the wide variety of products and tools Kaleyra offers, they also become flexible to the customer/business they partner with. Something like their Campaign Management and Direct Carrier Billing features makes it easier for companies to connect with their clients due to the available tools that Kaleyra provides.

Innovation – A CPaaS business that is able to continually innovate and stay ahead of industry trends is more likely to be successful. Innovation is a given since Kaleyra offers its products and services to its customers, thinks like Premium SMS as a new stream of payment, Verified Calls and Texts for your business (custom brand name, logos, and verified symbol when calling), and plugins for platforms like Shopify (SHOP), where it’s easier for businesses to connect with its customers. These innovative features that improve business client connection are why companies partner with Kaleyra.

Financial Performance – A CPaaS business that is profitable and has a strong financial foundation is more likely to be successful in the long term. Currently, Kaleyra is less profitable when compared to its sector median. It has a gross margin of 22%, which is below its sector median’s gross margin of 49%. However, the company is growing faster than its sector median, with revenue growth of 51%, compared to its sector median of 17%, which means that hope is still possible.

The factors above can potentially help Kaleyra on the long run. I personally believe that strong product offering, scalability, and flexibility is what Kaleyra currently possesses. You may have noticed that I have been focused on the future; however, let’s shift our focus to the present and discuss what is currently happening. Although having an idea of the potential opportunities is plentiful, let’s talk more about Kaleyra’s strengths and weaknesses, discuss the industry, and the growth drivers that can affect Kaleyra’s growth as a company.

The Chase of 5G and Digitalization Is Key To Growth

Digital transformation is adopting digital technology to change how businesses operate and deliver value to customers fundamentally. Integrating digital technology into all business areas fundamentally changes how the company uses and provides customer value. In 2022, global digital transformation spending was $1.59 trillion in 2021, and is forecasted to reach $1.8 trillion, a big market to penetrate, with expectations for it to grow in the following years since its forecasted to reach $3.7 trillion by 2030 at a 23.6% CAGR which is a high CAGR to consider for an industry that’s pretty hard to enter due to increased numbers of entrants and competition.

One key aspect of digital transformation is using cloud-based communications platforms as a service (CPaaS). CPaaS companies provide a platform that allows businesses to easily integrate real-time communication capabilities, such as voice, messaging, and video, into their existing applications and systems. Several factors are driving the growth of CPaaS companies in digital transformation:

Increased demand for real-time communication: With the rise of remote work and the shift to digital communication, there is an increasing demand for real-time communication tools that enable businesses to stay connected and collaborate effectively. By looking at the image above, we can see that revenue in the US grew by 42% and Europe by 307%, which means demands in US and Europe is increasing. Despite the growth in other geographic regions, the company’s revenue decreased by 1% due to reduced demands in India and Italy.

Ease of integration: CPaaS platforms are designed to be easy to integrate into existing business systems, which makes it simpler for businesses to adopt and implement them. Why do I think the “Chase of 5G” is necessary? Access to 5G speeds will give businesses faster customer data transfer speeds. This often means better stability during voice and video calls, which typically would mean a better customer experience. Additionally, products and services such as Chatbots can help businesses reduce labor costs by using AI-powered bots to answer customer questions. Kaleyra’s features, such as API Integration, will make it easier for the company to understand its customers by processing data efficiently.

Overall, I believe that digitalization and 5G integration will be prevalent in the future, increasing the demands of communication platforms, products, and services that Kaleyra offers. Combined with the company’s expanding its geographical footprint:

Our geographical footprint continues to expand into a healthy global balance that we will look to build on moving forward, especially, with Tier 1 mobile operators and enterprise customers.

– Dario Calogero Kaleyra Q3’22 Earnings Call

Kaleyra can potentially acquire more customers in different locations and is well-positioned for growth. Specifically, creating more opportunities to acquire clients such as the Fincons Group, which has a long-term relationship with Flowe. This is why I think this is the start of the company’s ability to acquire partnerships.

On December 2022, Kaleyra partnered with Fincons Group and Flowe, an Italian digital bank, to integrate Kaleyra Video, its proprietary audio, and video solution, into Flowe’s mobile application. The collaboration has enabled Flowe to offer its customers a personalized and secure experience by using Kaleyra Video to improve customer identification and fraud detection processes.

The integration of Kaleyra Video allows Flowe’s bankers to initiate and manage digital collaboration interactions with customers from within their app, improving the response rate and reinforcing trust in their services. The branded calls sent from Flowe’s app also help customers immediately recognize a contact request from bank staff, reducing the risk of vishing attacks. Additionally, the Kaleyra Video click-to-call feature allows users to connect with the bank in just one click from Flowe’s app without disclosing personal data, ensuring an outstanding user experience.

Additionally, I think this partnership with Flowe and Fincons Group will contribute to Kaleyra’s growth as a company in several ways:

1. It expands Kaleyra’s presence in the financial services sector, a significant market with a growing demand for secure and reliable communication solutions. By partnering with Flowe, a new-age digital bank in Italy, Kaleyra can showcase its capabilities and reach a broader customer base.
2. This partnership proves Kaleyra’s ability to acquire partnerships and customers, demonstrating its competitiveness and value proposition in the market.
3. If Kaleyra continues to acquire new partners and customers, it will further strengthen its position as a leading provider of communication services, which can lead to further growth and success for the company.

Overall, I believe this partnership with Flowe and Fincons Group is a strategic move for Kaleyra as it expands its presence in the financial services sector and continues growing its platform and customer base. It also aligns with Kaleyra’s mission of providing safe and secure communication services to its clients. The importance of cybersecurity and privacy, especially in the banking and financial services sector, is increasing, and partnering with companies like Flowe and Fincons Group that prioritize these values can help Kaleyra build trust and credibility with its customers.

Financial Analysis

Financial strength is essential for CPaaS businesses because it allows them to weather economic downturns, invest in new technologies and services, and meet financial obligations, such as paying employee salaries and vendor bills. A financially strong CPaaS business is also more attractive to customers and partners, as it can provide higher stability and security. Additionally, strong financials can give a CPaaS business the ability to pursue growth opportunities and expand its market presence.

Kaleyra had $83.92 million in revenues in the third quarter of 2022, which is a -0.13% year-over-year growth compared to 2021’s performance of $84.03 million. The company’s revenue growth has been averaging 64% for the past 52 weeks, and compared to its sector median of 17.29%; the company receives a growth grade of A from Seeking Alpha’s Quant Rating system. Similar to its performance in the previous quarters, Kaleyra has a relatively low gross profit margin of 19.90% in its Q3’22, but still in line with its 52-week average of 22.10%. Why do I say it’s a low gross profit margin? It’s because it’s way below its sector median of 49%, which gives Kaleyra a profitability grade of C minus since the company isn’t keeping much of its money from its revenues.

For the company’s financial position, Kaleyra had $86 million in cash in Q3’22, a 23% year-over-year growth from its Q3’21 performance. The company has $179 million in current assets and $111 million in current liabilities. By dividing the current assets by the current liabilities, we have a current ratio of 1.60, which is relatively decent since the company can pay its short-term liabilities with the assets they have. Since most of Kaleyra’s financing is from debt, the company has relatively high debt levels, which is shown by dividing its debt of $219 million by its total equity of $96 million which gives us a debt-to-equity ratio of 2.28. Overall, my theory on the global chase of digitalization remains the same. It’s true for Kaleyra and the other IT companies entering the digital space. Kaleyra’s at an early stage where it can disrupt the communications industry with modern APIs and messaging features that businesses use when communicating with their clients.

Valuation

For my valuation of Kaleyra, I’m going to use the rule of 40 since I’d like to treat Kaleyra as a software company selling its communications API to businesses. The rule of 40 is a principle where a company’s combined revenue growth and profit margin should equal or exceed 40. So we take Kaleyra’s year-over-year revenue growth of 51%, higher than its sector median of 17%, and add it to the company’s profit margin of 22%, below its sector median of 50%. So by adding 51 and 22, we get 73, which exceeds 40.

Additionally, when compared to companies like Zenvia, Inc. (ZENV), a communications platform based in Brazil, and Avaya Holdings Corp. (AVYA), a cloud communications solutions and multi-cloud application, Kaleyra has a low EV/Sales ratio of 0.54, which could signify that the stock is undervalued.

There is also a proposal for a reverse stock split to avoid being delisted in NYSE’s listing requirements. The proposal states a ratio between 1:2 to 1:5, and further information about the reverse stock split will be disclosed after the proposal is finalized. This happened because the company’s average closing price was below $1. What do I think of this? According to the ratios provided, it will likely boost the stock price slightly, around $2-$5. However, investors should note that these levels aren’t sustainable, so the stock price is expected to have a pullback; I don’t expect the stock to hold its price at these levels, considering that the company has been operating at a loss for a few quarters now. However, my thesis remains the same; it doesn’t change the company’s long-term value.

Kaleyra’s cost of sales is too high, the company requires significant growth and greater profitability in the near to medium term to create attractive financials. Just on the company’s Q3’22, the company had $67 million in COGS (Cost of Goods Sold), which resulted in a 19% gross margin. How can Kaleyra solve this? Increasing its revenues. How can it increase its revenues? By acquiring more customers and partners. In addition, Collin Gillis, Kaleyra’s VP of Investor Relations, said:

There’s a range of outcomes as to what the growth potential is. But I will tell you this, the desire for brand and customers, right, who want to connect to their clients is not going to disappear, right? And that is what CPaaS is, right, Communication Platform as a Service. and it will change and evolve into different channels, but the intent to want to communicate with your clients is always going to be there.

– Collin Gillis On Kaleyra’s Q3’22 Earnings Call

I stand by his statement that businesses and brands that want to connect with their clients will never disappear. Kaleyra’s revenue growth has averaged 50% for the past three years. Since the company’s been growing at that rate for some time now, I’d expect the YoY growth for FY22 to be around half that rate, around 25 or 30%. The company’s revenue will grow 20-30% by FY23 (granted that the company will continue to acquire some customers), which hopefully could result in a profit margin increase.

Kaleyra’s Major Risks

Just like any other company out there, Kaleyra is subject to risks that could affect the company’s performance and the value of the investments made by its investors. Here are some of the risks I think could affect the company’s goals:

1. The threat of new entry: Although uncommon, this is still a risk worth mentioning since new competitors could enter the market and begin offering similar products or services Kaleyra offers. This can be a risk for potential investors because it could lead to increased competition, resulting in lower stock prices and reduced profitability for Kaleyra.
2. Unable to acquire new customers: This risk refers to the possibility that the company cannot attract new customers, such as big businesses and clients that would like to avail their communication platforms and services, which could negatively impact its revenue and profitability. This can be a risk for investors because it could lead to a company’s financial performance decline.
3. The company can’t pay its debt: Considering that Kaleyra has a massive load of debt, there is a possibility that the company will be unable to meet its debt obligations, which could result in default or bankruptcy. This can be a risk for investors because it could result in the loss of their investment.
4. Remains unprofitable: While Kaleyra could be profitable in the future, it is still possible that the company will continue to be unprofitable, which could negatively impact its financial performance.

These are just a few examples of potential risks that investors might consider when evaluating a company. There may be other risks specific to the company or the industry that investors will also want to consider.

Final Verdict on Kaleyra

The global digitalization trend is creating significant opportunities for CPaaS companies to grow and succeed. As businesses embrace digital technologies and look for ways to improve communication and collaboration, CPaaS solutions will play an increasingly important role. Kaleyra could cause some disruption in the CPaaS industry, primarily if it acquires more customers in the future. I think Kaleyra is on a great growth path and is an excellent prospect as a value stock (once it proves its scalability and sustainability in the next few years). All the points in my article seem valid to me, and with analyst consensus expecting the stock to reach $4, it reinforces my Buy rating for Kaleyra.

Thank you for reading, have a great day!

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.