Kaleyra: This CPaaS stock has a healthy advantage (NYSE: KLR)

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Kaleyra (KLR) has just confirmed that it meets or exceeds its forecast for 2021. It is making all the right choices to become a significant player in CPaaS. The company is expanding its services with targeted acquisitions. The US market is rapidly becoming an important business sector.

Kaleyra exceeds her targets and steadily increases her margins. The stock remains unrecognized for the work so far. Acquisitions greatly dilute existing shareholders but are worth it. The company has expanded its product offering to a comprehensive omnichannel communication offering. It also added new geographies and increased its gross margins.

Post CPaaS

Kaleyra offers a CPaaS (communications platform as a service) for businesses. It’s a cloud-based business model with recurring revenue. Kaleyra enables businesses to connect with customers via SMS, voice, WhatsApp, video calls, emails, and more.

Leaderboard of CPaaS providers kaleyra

business thread

Kaleyra has a co-creator model. The company works with customers to find the right solution. This requires more work, resulting in lower margins than some competitors, but it increases rigidity. The company has zero churn for its largest customers.

External growth

Kaleyra acquired mGage and Bandyer earlier this year. Bandyer is a significant extension of Kaleyra’s CPaaS platform with audio and video services, and it has made Kaleyra’s offering complete for omnichannel customer engagement. Video offers many high-margin upsell opportunities with existing customers.

The addition of mGage is important for Kaleyra’s presence in the United States. The company immediately generated $10.2 million in revenue in its first month. The acquisition price of $215 million seems quite reasonable in this respect.

Organic growth

Kaleyra recorded an impressive 120% year-over-year growth in the last quarter. Although most of the expansion came from acquisitions, it also saw a 30% organic increase in revenue. It expects a continuation with revenue projections of $87 million to $89 million in the fourth quarter. 100% year-over-year growth at the midpoint of the forecast. I estimate the company is growing more than 20% organically in the fourth quarter.

The company’s revenue comes primarily from usage-based charges, which accounted for 98% of revenue in 2020. Interestingly, that’s changing as it’s only 95% for the first nine months of 2021. In the third quarter, usage-based charges were 92%. revenue, and the more predictable subscription fee increased from 2% to 8%.

A key aspect of growth is geographic expansion. Kaleyra’s main markets are Italy and India. Revenue share in the United States increased from 15.6% in Q4 2020 to 30% in Q3 2021, as expected following the acquisition of mGage. On October 11, KLR opened a hub in South Africa for the African market.

Kaleyra has a habit of guiding carefully and beating the boards.

Investing analysis of Kaleyra's profits

The author based on results publications * Adjusted for acquisitions

The overall CPaaS market outlook is promising. Customers expect an omnichannel approach with wide availability.

CPaaS Market Growth

Kaleyra Investor Presentation

Kaleyra should be able to benefit from the growth of the industry. The company has a complete offer and 20 years of experience in the sector. Its foundation is in Italy and India, where the market has limited it. It occupies a strong position in the highly regulated financial sector. Kaleyra has always had strict requirements for security, data protection and availability.

Increase margins

Kaleyra needs to increase her gross margins. Margins are low due to historical courier-focused business. Higher gross margins lead to increased free cash flow.

Margins of Kaleyra
Data by YCharts

Margins improved due to higher margin acquisitions and increased presence in the United States. A better product line also helps. For example, it achieves more than 45% gross margin for voice products, and the gross margin for video is even around 80%.

The increase in gross margin is already showing in the quarterly free cash flow. KLR achieved its highest free cash flow since its IPO:

Kaleyra Free Cash Flow
Data by YCharts

The company can already generate a small positive free cash flow with this low gross margin. As revenue increases and gross margin improves, I see the possibility of high free cash flow. Free cash flow will most likely fluctuate in the short term as it incorporates more acquisitions and seeks more growth.

Balance sheet

Kaleyra’s balance sheet contains approximately $100 million in cash and short-term investments. Just keep going until the business becomes consistently positive.

Its largest long-term debt consists of convertible notes of $189.2 million. These convert to 11,851,852 shares at $16.875 per share.

There are only 5.4 million money orders left in circulation, so it is no longer a considerable risk. Warrants are settling in and Kaleyra has already redeemed some at $3.25 per underlying share.

Evaluation

Kaleyra looks very attractive at its current valuation.

Report PS KLR
Data by YCharts

A PS ratio of 1.4 is cheap for a company with 20-30% annual growth prospects, growing profitability and a strong balance sheet. There is a short-term upside in the stock price as the company continues to achieve its expected growth. The long-term opportunity is much greater once the company’s margin profile improves. I expect strong cash flow with slightly higher gross margins.

Risks

The most important risk for me is further dilution of the shares due to acquisitions. A sizable acquisition could significantly dilute existing shareholders while increasing integration risk. The company has made disciplined acquisitions so far, and the price was right, and the value was clear.

Another risk is the margin. Kaleyra’s margins are well below those of its peers. I think they will gradually increase. The company is on track to increase its margins.

Comparison with competitors

Comparing companies is tricky because they have different opportunities, margins and perspectives. It’s always interesting to see how they compare to each other.

Society P/S Gross margin The net profit margin Market capitalization
Kaleyra 1.39 19.9% -14.07% $366 million
Twilio (TWLO) 15.5 50.1% -32.89% $40.57 billion
Bandwidth (BAND) 3.6 45.4% -8.19% $1.55 billion

It’s clear that Kaleyra is cheap compared to her larger peers. BAND seems reasonably priced at KLR’s double PS ratio but with better margins. Bandwidth has some temporary issues that dampened the fourth quarter outlook. I consider Kaleyra to be the stock with the most upside potential.

Conclusion

Kaleyra is a high-growth CPaaS stock that is undiscovered by investors. It is performing well with a robust growth rate both organic and external. The company made the right choice with its recent acquisitions. They add potential for growth in high-margin products and geographic expansion. At the same time, Kaleyra is expanding its margins. Over time, this could lead to high free cash flow.

The downside seems limited to this PS ratio. I see a strong possibility for another revenue beat in the fourth quarter, which could already increase investor interest. The recent update seems optimistic but does not yet confirm better results.

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