September 07, 2021 - 10:57am EST by
2021 2022
Price: 12.84 EPS 0 0
Shares Out. (in M): 46 P/E 0 0
Market Cap (in $M): 584 P/FCF 0 0
Net Debt (in $M): 134 EBIT 0 0
TEV (in $M): 718 TEV/EBIT 0 0

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Kaleyra (KLR) provides the opportunity to buy a fast-growing company in a space full of strong secular drivers at a compelling valuation.  The stock is a double+ from current levels. 

KLR is a Communication Platform as a Service (CPaaS) provider and offers a wide variety of mobile communications channels, tools, solutions, and services that developers and enterprises can access through an API or a user-friendly web interface.  As an example, KLR helps transmit secure text messages when a customer wants to employ two-factor authentication for security purposes.  The two-factor authentication is often used in secure financial transactions but is also growing in its adoption across relatively routine occurrences such as securing a rental car or remotely signing on to your work computer.  The backbone of the two-factor authentication runs through a CPaaS provider such as KLR.  The company’s offerings cover many end-market verticals including financial services, e-commerce, retail, healthcare, travel and education.   KLR has 3.8K global customers, with no individual customer accounting for more than 10% of revenue. 

KLR recently closed on the acquisition of mGage, a transformative event that doubled the size of the company and meaningfully diversified its end markets.  mGage is focused on CPaaS solutions to help a business acquire customers, vs. KLR’s focus on supporting transactions.  KLR and mGage have very little customer overlap such that cross-selling is a real opportunity.  Scale in the CPaaS industry matters, as the cost of messaging declines with volume.  KLR is now the #5 player in the world.  Geographically, KLR was historically heavy in Europe (47%) and APAC (23%), while mGage was 41% US and 28% ROW (decent Brazil exposure).  The US market has higher margins than international.  On a combined basis KLR will be roughly 1/3rd Europe, 1/3rd US, and the remainder split across APAC and ROW.

KLR’s CPaaS platform is well positioned to benefit from very strong secular trends.  Three key trends worth highlighting are 1) cloud adoption and digital transformations which embed more communications into workflows and applications 2) growing mobile usage and 3) increased personalization and automated interaction with customers/users across every industry.  Industry consultants estimate the end market will continue growing 25-30% annually and based on our diligence calls, it is reasonable to assume KLR grows in-line to better than the market.  Juniper Research estimates the CPaaS market will grow from $7.2B in 2020 to $25.9B by 2025.  Other players in the industry include Twilio, Sinch, Vonage, Infobip and Bandwidth.

The company has recently made real progress cleaning up its complicated capital structure as it cut its warrant count and eliminated complex forward repurchase agreements that were part of the initial SPAC transaction.  mGage was a nicely accretive transaction for KLR and Gross Margins should quickly approach 30% (from the low 20s) while Adjusted EBITDA margins should move from the mid-single digits to the low-to-mid double digits.  Nonetheless, KLR remains very attractively valued (approx. 1.8x TEV/Fwd. Revenue) and the stock trades at a meaningful discount to its peers (5.0x-15.0x TEV/Revenue).

The reasons for the valuation disparity are:  (1) SPAC “Taint”.  KLR came public via a messy de-SPAC-ing process in late 2019.  While almost all the remnants from the SPAC have been cleaned up, there is likely still some perception overhang from this.  (2) Mgmt. Communication.  CEO and CFO are both Italian nationals.  A combination of some language issues plus inexperience with the public markets has led to less than perfect communication.  (3) Covid.  With decent exposure to Italy, India, and Brazil, KLR has felt significant COVID headwinds.  (4) Guidance Disappointment.  Shortly after closing the mGage transaction in June, KLR took down its pre-deal guidance for mGage that it had issued in January.  This was primarily the result of Covid headwinds in some of mGage’s markets.  Importantly, KLR has not reduced guidance for its side of the business … only for mGage.  Nevertheless, the guidance reduction caused a not-unwarranted hit to credibility.

We think all these issues are temporary and will dissipate over time.  The secular growth in the CPaaS industry should help lift all boats.  If anything, KLR should have a slight growth advantage in the near-term as some of its over-exposed Covid countries snap back.  KLR should easily grow 20%+ for multiple years.  Even without multiple expansion, the result would be a very good outcome.  However, we would be surprised if the execution against that growth opportunity is not accompanied by significant multiple expansion given KLR’s massive discount to its peers. 

The risk reward here is extremely compelling given the growth profile and potential for the multiple to re-rate.   With relatively decent execution, it is easy to see KLR’s stock doubling from current price levels.  With $100mm of cash on its balance sheet, KLR is likely to execute additional acquisitions over the coming years.  However, KLR itself is also a takeover candidate.  It would not surprise us to see KLR eventually be acquired by one of the larger CPaaS players.



This posting is solely for the evaluation of club members and is not a recommendation to buy or sell this stock.  The views expressed are those of the author individually and should not be attributed to any affiliated investment firm, which may or may not hold positions consistent with the views expressed herein and may buy or sell shares at any time.





I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.




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