iQSTEL Inc (IQST)

[dh_]

Hi OM and all.

As we knew, revenues jumped up. The limiting factor this quarter was that the gross margin dipped back a bit.

I have mentioned here before how the company has advised in past filings that new business involves lower margins initially, until they can renegotiate more favorable rates. That could explain the lower margin this quarter as the company had one of the largest sudden revenue increases of recent data at about 33%.

If you look at their breakout you can see that it was Etelix that grew so fast in Q2. Somehow they managed to more than double Etelix revenue, as $10.7 million is about 2.5 times Etelix Q1 revenue of $4.3 million. It would be very interesting to know how this happened. Did they add service for a new large carrier? Did they open up in a new geographic region? Simply organic growth as the company becomes more established and well-known?

The other companies held fairly steady except IOT Labs which I think is mostly the Austin SMS business. It had another solid increase of about 13% and that's on top of about the same increase from the Q4 22 to Q1 23 timeframe.

What is interesting this quarter is that SMS Austin has long been the largest revenue generator for the company in recent years representing 62% of all Q1 revenue. But with Q2 Etelix has jumped from 18% of iQSTEL revenue up to 33% while SMS Austin has dropped from 62% to 52%.

That is important for at least two reasons. The first is that iQSTEL should be stronger with less dependence on any one of its holding companies. The other reason is that iQSTEL's history of tepid gross margins has been largely due to SMS Austin having very low margins, and yet were representing the majority of company revenue. The growth in Etelix came with a gross margin of 6.29%, and that's higher than the Q1 margin of 4.93%.

In other words, the most of the growth seen in Q2 helped towards increasing the total iQSTEL margin even as the total gross margin was lower in Q2. This would have been very obvious if SMS Austin had not seen a pullback in margin for Q2, and recall that it still represents a little over half of all company revenue. Growth that adds to the gross margin is just what is needed, and Etelix did just that.

For me, the takeaway is that Q2 is evidence that iQSTEL can grow out of its operation at just below breakeven, if they can continue to add higher margin new business, and/or they can improve SMS Austin's margin. Imagine Q2 with the Q1 margin of 4.93%. That would have added more than $800 thousand available to the bottom line, and easily created a profit. The increased revenue alone could have added more than $200 thousand at the higher margin.

In any case, you can see how adding higher margin revenue can help the company towards profitability. iQSTEL needs to continue that process, especially if SMS Austin margins continue to be so tight. One more surge in Etelix or any other higher margin area could make a huge difference with the company sitting so close to busting out over the breakeven mark. Hard to say if it happens, and then when it happens, but Etelix revenue alone has more than tripled since Q1 21, so the trend shows in that favor. Etelix margins have fluctuated but generally have tended to outpace SMS Austin by a good measure on average. Of course the company comment was that they plan to achieve profitability by the end of this year.

Although modest, I think we should recognize an improvement in Gen, and admin, expense this quarter. I think that shows determination to reach profitability in any way that can help, and that helps too.

IMO, the lack of superfluous communications recently is appropriate and refreshing. This small telecom company is growing and very near profitability. There is no need for much mention of EV, or other new ventures, until or unless there is some substantial development such as announcement of a new and active revenue stream. And then if it happens, I would think the new possibilities will seem so much more real, relevant, and potentially exciting.

In the meantime, IMO, I see a company getting all their ducks in a row, like so many companies before them, that they need to position for the chance of sustaining profitability. Maybe it takes a little longer than expected. Hopefully it happens. But at an operating loss of around $250 thousand that is really so very close, and does not require having to make any bad deals to keep operating. That can be just a small loan at this point.

Margins and expenses may fluctuate. There may never be a quarter up till now or in the next few that long investors don't hope to see profitability come through. I think at this stage of the company any few different factors could make profitability appear or keep it at bay for a few quarters. It seems just as likely to me that any number of recurring or one time expenses could hold iQSTEL at around breakeven or any number of improvements such as even a modest margin improvement could set iQSTEL over breakeven. The company isn't over breakeven not to mention enough over breakeven to absorb some unforeseen and limiting expenses, But arguably they are strong enough at this stage to not go far below breakeven as well, at least not without a lot of bad luck perhaps.

Looking at any company is it losing millions, near breakeven, or making millions? We know where iQSTEL was a few years ago, and about where it is now. You just have to consider what you see as the trend and whether you think the trend is your friend I think, if you are considering a longer term. I'm sure hindsight will be 20/20 some day, for wherever that you may think that leads.

Just my thoughts, not investment advice.