In a technologically driven world, interconnectivity has become the name of the game for businesses looking to streamline company operations and maximize revenues. From laptops to mobile phones, and anything else that comprises the "Internet of Things", the ability to seamlessly access data anywhere and at any time is an invaluable component of any modern company. While reliable access is crucial, there is also no doubt that cloud computing has revolutionized the way that companies and small business alike store and protect data, offering omnipresent and tightly secured access to owners most essential files. And, with the growth of cloud-based applications on the rise, coupled with an absolute need to implement more comprehensive support for cloud computing technology, now is an opportune time for investors to focus on emerging companies that are taking advantage of proprietary and innovative technology to secure a competitive position in a multi-billion-dollar industry.
With no shortage of experience, and boasting a significant backlog of revenue-generating opportunity, Pareteum (NYSE: TEUM) may indeed to one of these emerging players, and is apparently on a mission to become a world-class leader in cloud communication and connectivity services.
TEUM Is Connecting The Cloud To The Masses
Pareteum is already a ripening competitor in the cloud computing sector, with a goal of helping their clients connect "every person and every thing". The company's targeted focus is to provide an all-in-one solution to businesses looking for ways to efficiently streamline application connectivity while generating additional revenue in the process. Pareteum's unique and disruptive "Software as a Service (SAAS)" business model is propelling the company toward quickly becoming one of the fastest growing connectivity providers within their sector.
The secret has been out for a long time; technology is changing at a pace that far exceeds advances in any other industry. And, not to be left behind in the technological boom, the evolution of the internet has shaped its own needs, paving the way for "cloud" computing to become an essential tool that serves up tremendous integrated service benefits to almost any type of business. Taking advantage of the trend, Pareteum, under a subscription-based platform, enables its clients to connect with their customers efficiently, and at the same time interlink employees and business operations. The innovative design of TEUM services allows clients the additional ability to meter, charge, and bill for any distinguishable usage of the platform, allowing businesses to generate revenue and gain informational insights from connected customers and their devices. Far from being classified as only a "large company" tool, the benefits of the Pareteum product can enhance businesses of any size, banking on the growth from the "Internet of Things" that continue to get integrated into a broad range of the tools people use each day.
Pareteum is not ignoring the large companies, though, and is facilitating its strategy to become a leading provider of cloud services to established communication service providers, including network telecom sector giants. While some of these telecom companies that are looking to implement connectivity services may argue that such platforms don't require a third-party provider like Pareteum, they are naive. Thinking it through, they need to consider the alternative solution: a time-consuming and pricey technological buildout under company time, or continuing to operate as-is and suffer potential losses as adaptive competition embraces the convenience and safety offered by cloud-based connectivity solutions. Further, if they decide to build out their own infrastructure, it will likely be obsolete before they even launch the network.
A Defined Road To Profitability
Not only is Pareteum targeting their strategic initiative to help their clients unify workplace operations and create additional avenues of revenue, but their unique business model is designed to facilitate low operating costs with high returns. Pareteum's patent-protected, subscription-based SaaS model allows the company to operate without the need to invest in any proprietary telco infrastructure, removing most of the costly and restrictive headwinds faced by many of the company's competitors. Think of it this way: Facebook, one of the world's most famous media owners, produces no content of their own. Uber, a world-leading transportation service, owns no vehicles. Likewise, Pareteum can provide valuable services that allow both its clients and Pareteum to generate substantial revenue, while Pareteum themselves remain free from the burden building its own network infrastructure. And, when it comes to pathways of potential income, there has never been a better time to take advantage of the lucrative opportunities offered by a cloud computing platform. In the current user environment, connectivity is ubiquitous – in fact, customers get connected through integrated channels at far higher instances than they may realize. Thus, the opportunity is abundant regardless of when it's recognized.
From consumer products such as smart watches and GPS navigation systems on modern automobiles, the Internet of Things (IoT) is estimated to encompass over 30 billion connected devices. This inter-connectivity offers accretive benefits to business and consumers alike, including data storage services, network interconnectivity, payment platforms, and more. But, while all of these may connect to the cloud in some way or another, there is still segmentation between the various platforms. As business becomes more connected, however, the demand for universal and ever-functional connectivity will increase almost exponentially within those integrated relationships, requiring a service that can facilitate the application for data transfer. To put that in simple terms, Pareteum wants to be the company that keeps every user in the chain efficient, in the loop, and competitive within their sector.
Pareteum intends to seize this lucrative opportunity by providing a more seamless and reliable connection that can integrate communication to any device, despite its location. Then, through the services offered by Pareteum, clients can make use of cloud connectivity, machine learning, data analytics/insight, security services, and payment systems, including cryptocurrencies and blockchain systems. Pareteum offers their clients these services through three competitively priced suites of services, allowing companies to select the tier of services that best fit their business needs. The tiered model is inviting, and TEUM can scale services to meet the demands of business large and small.
An additional significant and competitive advantage held by Pareteum is their speed of delivery relative to DIY platforms that offer similar solutions. The company's Managed Service Platform can bring a contract to cash in only 120 days, while the Global Cloud Services Platform and TEUM Application Exchange Platform boast a 30-day contract to cash schedule. Clearly, today's technological environment has resulted in a perfect storm of conditions in which Pareteum is in an ideal position to take full advantage, reaping the benefits that come with servicing multiple avenues of revenue.
Don't Ignore The $162 Million Contractual Revenue Backlog
Where investors should be placing a great deal of attention is toward the Contractual Revenue Backlog (CRB) number that TEUM shows in its most recent investor presentation. Now, to be clear, these CRB estimates are taken directly from the TEUM website and recent press releases, but keep in mind that not every business projection or strategic initiative is guaranteed to produce 100% results. However, many investors hold to a firm belief that the company will execute on recognizing a significant portion of these revenues over the next few years, which may serve as the ultimate value proposition for investors.
First, investors need to understand that Contractual Revenue Backlog gets measured by a forward-looking monthly view of the execution of strategies that generate revenue from each of TEUM's managed services. At TEUM, investors should focus toward the next 36-month period for when TEUM can record full benefit from the current revenue backlog. And, for investors, it's a vital timeline. Why? Because as it stands, with the CRB now sitting at an estimated $162 million over the next 36 months the chance for investors to capitalize on a fundamentally flawed valuation and share price multiple at TEUM may soon slip away.
The revenue opportunity is now in place for TEUM, with the CRB getting accrued and generated by each of TEUM's managed services, global mobility cloud services, and from its application exchange and developer's platform customer base. For Pareteum, the explosive revenue growth will stem from their multi-year Software-as-a-Service agreements that include service origination and implementation fee's, guaranteed minimum monthly recurring fee's, as well as from contractually scheduled subscribers that contributes to a recurring monthly revenue stream to TEUM.
Beyond the contracts, the method is equally impressive, and with TEUM integrating a market disruptive SaaS business model, TEUM may become one of the world's most innovative communications and services companies, taking advantage of cloud-based opportunities that significantly lower capital investment in infrastructure into existing multi-billion-dollar markets. And, with company growth driven by innovative and market changing technology that can deliver improved client services, slash operating costs, and increase the revenue opportunities for its customer base, the recipe for substantial success is in place.
Growth Supported A SaaS Model
TEUM's unique business model has allowed them to operate at a low cost, high margin output, and this has resulted in the company becoming one of the fastest growing providers in the industry. Pareteum is experiencing remarkable growth in almost every targeted sector, and their business model easily allows for this trend to continue scaling upward. At TEUM, both average annual revenue per employee and yearly revenue per connection saw steadily increasing profits throughout the entirety of 2017. As a SaaS provider, efficiency at TEUM is high, with gross margins remaining within the 70-79% range. Also, the company's monthly recurring subscription model results in stacking generators of revenue, bringing in more profit for the company at comparatively little cost.
TEUM enjoys significant partnership relationships, which hold the potential to bring rapid and global growth to the platform. Currently, the company's platform integrates technologies from some of the most recognizable names within the tech industry, such as Vodafone, Oracle, Microsoft, IBM, AirFox and Sonus.
On the expansion front, Pareteum has a strategic alliance with Artilium, which has a strong presence in Asia-Pacific, Africa and Latin America, not only provides immediate opportunities for both companies but also opens doors for Pareteum to reach out to additional network telecom giants – which could potentially result in substantial opportunities for TEUM. The company has described this newfound alliance as a "global license to hunt," as the services provided by the growing business will likely catch the eye of key players within the telecom industry, inclusive of Liberty Global and Vodafone, with whom TEUM already serves. The services provided by Pareteum are especially valuable to companies like Vodafone, and if TEUM continues their trend of capitalizing on market opportunities, the company could potentially see adoption rates eclipsing multiple millions of new connections through globally positioned telecom providers within the next three years.
Key Performance Indicators Suggest Valuation Will Rise
- Average annualized revenue per employee, from $177 in Q1 2017 to $225 in Q3 2017
- Average annualized revenue per connection, from $9.76 in Q1 2017 to $11.12 in Q3 2017
- Connections by month, from 1,146,825 in January 2017 to 1,273,314 in September 2017
- Churn of less than 0.3%.
- Backlog conversion from 104% in Q1 2017 to 121% in Q3 2017
Although the performance indicators are a compelling component driving momentum, other indicators make a powerful case for increasing share price valuations. During the first nine months of 2017, for instance, Pareteum reported between 104-121% backlog conversion versus planned backlog. The conversion rate is not only strong, it is deserving of a multiple that more fairly represents TEUM against peer companies.
Currently, SaaS peer companies enjoy revenue multiples of 10-12X, which would equate to between $130-$156 million in the current TEUM run-rate. Extrapolating that multiple may deliver share prices of between $2.60 – 3.12 per share, based on the roughly 50 million shares of stock outstanding. Beyond that, however, additional value can get justified by adding comparative value from SaaS peer revenue backlog multiples of 2-3X, which would equate to $294-441M or $5.88 - $8.82 per share, based on the approximate 50 million shares outstanding.
TEUM Is Communicating Strong Growth Message
Led by CEO Vic Bozzo, along with a team of successful and experienced entrepreneurs, Pareteum has built a solid foundation to grow their company. Mentioned earlier, as of the first quarter of 2018, TEUM has built up a $162 million 36-month contractual revenue backlog and is prepared to act upon plans to expand company operations and outreach further. And, Pareteum's model of services enables the company to accelerate this growth by bringing in significant revenues each month, while minimizing any operative and overhead costs. So, that $162 million number will undoubtedly increase, and once the market takes notice investors may see TEUM get provided the share price multiple they deserve and put the value more in line with its peer competitors.
The company's patented SaaS software, by the way, is a result of years of fine-tuning and is not easily replicated, creating significant barriers to entry for those attempting to design and invest in an in-house solution. The technology is a key differentiator and the impetus to disrupting the cloud-based opportunity. For instance, the company has secured a $3M contract with an established South African data network provider, which will allow the client ease of mobility, and to integrate further connections within Pareteum's ecosystem. The company is also exploring other outlets of potential revenue sources, with interest in developing relationships with clients launching mobile gaming apps that can utilize the in-app billing services facilitated by the Pareteum platform. Keeping in mind that with the 2017 global in-app purchase sales estimated to reach roughly $37 billion, these newly surfacing opportunities present significant untapped reserves for TEUM in 2018.
A Compelling Value Opportunity
As of January 30, TEUM is trading at $2.13 a share, with a market cap of $100M. Compared to peer companies, the multiple is significantly discounting a substantial portion of the revenues expected in the CRB alone. To further validate a case for a higher valuation, TEUM is an actively immersed, technologically advanced company led by experienced management. Then, add in the low operative costs and the growing business relationships with industry leaders, an investment consideration into TEUM stock may be a wise endeavor.
But, rather than relying on pure speculation as to what the appropriate valuation for TEUM should be, investors were provided a prospective roadmap at the end of January. On January 29th, Callidus Software Inc. (doing business as CallidusCloud®) announced that SAP America, Inc. has agreed to acquire CallidusCloud, a SaaS model leader in cloud-based Lead to Money (Quote-to-Cash) solutions. The per share price represents an enterprise value of approximately $2.4 billion. What investors should notice in this deal is that like Pareteum, CallidusCloud employs a SaaS business model, and the terms they struck with SAP demonstrates the opportunities for long-term rewards of investing into micro-cap companies with strong fundamentals, defined strategies, and a strong executive team to drive the growth. The $2.4 billion price tag for CallidusCloud is impressive, with CallidusCloud generating roughly $250 million in annual income in a SaaS business model it represents about 10X revenue. For Pareteum investors, a similar story may unfold with valuations mimicking that of CallidusCloud.
An Active Company That Will Earn Its Appropriate Valuation
Most of all, investors must realize that TEUM is not sitting still, and they are actively dedicating their resources to continue expanding the breadth of services of their platform to increase their market share around the world. What can't get stated enough, though, is that Pareteum has the advantage of providing services that are becoming a necessity for companies of any size. Cloud-based computing is not going anywhere for the foreseeable future, and Pareteum's planned expansion of its services will address to adapt to fit the needs of an evolving industry. And, despite the fact that others in the industry get saddled by enormous capital expenditures, TEUM enjoys industry-low operating costs and has the resources and time to pursue acquisitions and partnerships that will further their overall brand.
Modestly stated, TEUM offers investors a logical case for investment consideration. Not only do they have momentum on their side with a $162 million backlog to prove that point, but TEUM has also built a patented service in an industry with high barriers to entry. From a competitive perspective, though, the company already provides solutions that an increasing number of operators need a service like theirs to remain competitive in their respective industry. And, when demand outstrips supply, the outcome is typically good for the providers, and with TEUM providing market services that many consider being disruptive to the status quo, the investment thesis for Pareteum gets even stronger.
This article was originally featured on CNA Finance!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.