Paltalk, Inc. (PALT) Q3 2024 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

Paltalk's earnings call reveals significant financial challenges, including a 23.4% revenue decline, 333% increase in operational losses, and liquidity concerns. The absence of a shareholder return plan and increased litigation risks further exacerbate the negative outlook. The Q&A session offered no substantial reassurances, with management's responses lacking clarity on growth prospects. Despite a potential $65.7 million award, uncertainties remain. Given these factors, the stock is likely to experience a strong negative reaction, with a price decline exceeding 8% over the next two weeks.

Key Financial Performance

Revenue (Q3 2024) $2.1 million, a decrease of 23.4% from $2.8 million in Q3 2023, attributed to a decrease in subscription revenue of 23.9%.

Loss from Operations (Q3 2024) $1.7 million, an increase of 333% from a loss of $0.4 million in Q3 2023, attributed to the decrease in revenue and an increase in professional fees of $0.8 million related to the Acquisition Agreement and Divestiture.

Net Loss (Q3 2024) $1.5 million, an increase of 731.2% from a net loss of $0.2 million in Q3 2023.

Adjusted EBITDA Loss (Q3 2024) $1.4 million, an increase of approximately 1046.2% from an adjusted EBITDA loss of $0.1 million in Q3 2023.

Revenue (9 months 2024) $6.9 million, a decrease of 16.2% from $8.3 million in the same period in 2023, primarily due to a decrease in subscription revenue of 17.5%.

Loss from Operations (9 months 2024) $3.6 million, an increase of 129.9% from a loss of $1.6 million in the same period in 2023, attributed to the decrease in revenue and an increase in professional fees of $1.1 million related to the Acquisition Agreement and Divestiture.

Net Loss (9 months 2024) $2.9 million, an increase of 274.3% from a net loss of $0.8 million in the same period in 2023.

Adjusted EBITDA Loss (9 months 2024) $2.9 million, an increase of approximately 265.1% from an adjusted EBITDA loss of $0.8 million in the same period in 2023.

Cash and Cash Equivalents (as of September 30, 2024) $12.1 million, a decrease of $1.5 million compared to $13.6 million at December 31, 2023.

Long-term Debt (as of September 30, 2024) No long-term debt on the balance sheet.

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Operating Highlights

Acquisition of Newtek Technology Solutions: Paltalk signed a merger agreement to acquire Newtek Technology Solutions for $4 million in cash and 4 million shares of preferred stock, with an additional earn-out payment of up to $5 million based on adjusted EBITDA thresholds for 2025 and 2026.

Divestiture of Vumber and Applications: Paltalk entered into an Asset Purchase Agreement to sell its telecommunications services provider, Vumber, and its Paltalk and Camfrog applications to Meteor Mobile for $1.35 million.

Cash Position: Paltalk reported a cash balance of $12.1 million as of September 30, 2024.

Litigation Award: Paltalk was awarded $65.7 million in a patent infringement case against Cisco, with expected proceeds to be significantly reduced due to litigation expenses.

Focus on Cloud and Cybersecurity: The acquisition of Newtek Technology Solutions will allow Paltalk to enter the cloud infrastructure and cybersecurity sectors, which are expected to grow rapidly.

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Risk or Challenges

Merger Agreement Risks: Paltalk is acquiring Newtek Technology Solutions for $4 million in cash and 4 million shares of preferred stock, with an additional earn-out payment of up to $5 million based on future performance. Risks include integration challenges and the potential for the acquisition not to meet projected revenue expectations.

Divestiture Risks: Paltalk is selling its telecommunications services provider, Vumber, for $1.35 million. The divestiture is required under the merger agreement, which may lead to operational disruptions and loss of revenue from the sold applications.

Litigation Risks: Paltalk won a $65.7 million judgment against Cisco for patent infringement, but the actual proceeds may be significantly lower due to litigation expenses and potential appeals by Cisco, creating uncertainty regarding the financial benefit.

Revenue Decline Risks: Paltalk reported a 23.4% decrease in revenue for Q3 2024 compared to Q3 2023, primarily due to a drop in subscription revenue. This trend raises concerns about the company's ability to sustain operations and growth.

Increased Operational Losses: The company experienced a 333% increase in operational losses for Q3 2024, attributed to decreased revenue and increased professional fees related to the acquisition and divestiture, indicating financial strain.

Market Competition Risks: Entering the cloud infrastructure and cybersecurity sectors presents competitive pressures, as these markets are rapidly growing and may attract significant competition, impacting Paltalk's market share and profitability.

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Guidance & Outlook

Divestiture of Vumber and Applications: Paltalk entered into an Asset Purchase Agreement to sell its telecommunications services provider, Vumber, and related applications to Meteor Mobile for $1.35 million, which is required under the merger agreement with NewtekOne.

Focus on Cloud Infrastructure and Cybersecurity: The acquisition of Newtek Technology Solutions will allow Paltalk to enter the cloud infrastructure and cybersecurity sectors, which are expected to provide growth opportunities.

Intellectual Property Defense: Paltalk will continue to defend its intellectual property, including a recent $65.7 million judgment against Cisco for patent infringement.

Revenue Expectations from Newtek Acquisition: The acquisition of Newtek Technology Solutions is expected to have an immediate and meaningful impact on Paltalk's revenue, as Newtek's revenue in 2023 was approximately three times greater than Paltalk's.

Future Growth Opportunities: Paltalk anticipates enhanced opportunities for future growth and optimization following the acquisition, with a focus on managed cybersecurity and cloud hosting.

Expected Closing Date for Acquisition: The acquisition of Newtek Technology Solutions is expected to close by the end of the first quarter of 2025.

Cash Position: Paltalk reported a cash balance of $12.1 million as of September 30, 2024, to support its growth initiatives.

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Shareholder Return Plan

Cash Balance: Paltalk has an ample cash balance of $12.1 million as of September 30, 2024.

Acquisition Payment: Pursuant to the merger agreement with Newtek Technology Solutions, Paltalk will pay $4 million in cash at closing.

Share Issuance: Paltalk will issue 4 million shares of newly created series of preferred stock to Newtek.

Earn-out Payment: Newtek is entitled to receive an earn-out payment of up to $5 million based on the achievement of certain cumulative average adjusted EBITDA thresholds for 2025 and 2026 fiscal years.

Divestiture Cash Payment: Paltalk agreed to sell its telecommunications services provider, Vumber, for a cash payment of $1.35 million.

Litigation Award: Paltalk was awarded $65.7 million in a verdict against Cisco Systems for patent infringement, with expected net proceeds to be no more than one-third of the gross award after litigation expenses.

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Key Q&A

Q:Can you provide any color on when you would expect to see any money from that judgment and a date range of when that might be?

A:On October 8, 2024, an order granting a motion for final judgment was entered into by the court and signed by Judge Alan D. Albright in the amount of $65.7 million in connection with the lawsuit. The final judgment was entered in our favor and started the time for filing any post-trial motions or appeal.

Q:In regards to the Newtek Technology Solutions acquisition, can you please explain and give some detail as to what the business specifically does and perhaps give an example of a client and what it does for them?

A:NTS provides a range of IT-related services, including managed IT, managed security, managed backup and disaster recovery, secure private cloud hosting, professional services consulting, product procurement services, web hosting, and e-commerce solutions, as well as implementing technology solutions for enterprise and commercial clients across the United States. NTS delivers secure and compliant services to customers within heavily regulated industries, including financial services and healthcare.

Q:It appears to generate significantly more revenue than your prior Paltalk business. But what gives you the confidence it’s a business with growth prospects? And are there additional likewise businesses you feel you can also acquire?

A:Well, managed cybersecurity and managed cloud hosting are growing rapidly worldwide. We believe the acquisition of NTS gives us the ability to enter the cloud infrastructure and cybersecurity sectors, both business-themed ripe for growth, both organically and through potential accretive acquisitions in the future.

Q:Review of Unclear Management Responses

A:Management did not provide a specific timeline for when they expect to receive the proceeds from the Cisco judgment, only stating that the final judgment has been entered and that the time for filing post-trial motions or appeals has started.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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