Earnings Call: Q4 2018

Feb 22, 2019

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's End of Year Report January, September 2018 Conference Call. At this time, all participants are in a listen I must advise you this conference is being recorded today. On Friday 22nd February 2019. I would now like to hand the conference over to your first speaker today, Thomas Heath. Please go ahead. Good morning, everyone, and warmly welcome to Cinch Q4 2018 Conference Call. My name is Thomas Heath. I'm Chief Strategy Officer, I'm Head of Investor Relations. With me today, I have our CEO, Oskarvaner and our CFO, Odup Puilu. With that, I'll hand the word over to Oscar. Okay. And warm welcome from me as well. And so let's kick off. We'll give a few overview slides first and then dive straight into the financial figures. So, on the slide, since you had a glance, just to repeat what we're doing, we deliver customer engagement through mobile technology. What we mean with customer engagement is basically via our platform. You can reach anybody in the world within seconds. We have a 98% open rate and we have a read rate of 90% within 3 minutes. That is better than any other platform that we know of, if you compare with email, for example. And using that for engaging customers is very effective. This is a cloud communications platforms, and you can use it for messaging, voice or video. Our the type of services we offer have a 100% consumer penetration, meaning practically, everyone of the adult population in the Western World are using this type of services. Anybody that you meet on the street have Gopener don't play through a doctor's appointment. They have a call. They're ride hailing company via an app or they have used a video service to connect to the doctor or something like that. So it's a very, very widespread, very high penetration market. It is also a growing global multibillion dollar market. Any way you look at it's a large market and any way you look at it, it's growing with good figures. We serve 8 out of 10 of the largest U. S. Tech companies. And as a company focused a lot on serving the largest companies and that's a stronghold for us and also what's driving a portion of our growth. We also deliver software for mobile operators based on the same underlying platforms. We have a deep technical competence all the way down through the stack. To mobile operators and all the way up to enterprises. Okay. If we then go to the next slide, Very short, just showing growth markets here. We're just showing the messaging part, the CPaaS part, So the application, and we're not showing the voice and video on the slide, just to avoid it too much text. The application to messaging, application to personal messaging market is around about $10,000,000,000. And there are 3rd party market estimates vary between 10.50. We prefer to take the most conservative estimates. Then we have the CPaaS markets, which you can see as the additional services that you can do on top of the Trans patient layer. So smart software functions, that is more than just delivering a message or terminating a voice call. That market is in high growth, various external market estimates show that it's gross between 30% 60%. Also, as you may have seen, we have done a successful rebrand from 4 brands into 1. And so we were in innovation. We had 4 brands in the market, CielX, and soft essential vehicle. And we wanted to unify both for our customers to make it easier, also internally to use it as a morale increase or mile booster. So we have decided to launch the brand Cinch, which is on the next slide, which we're now using for all our operations. This has been very well received both by customers. We think it's easier to understand this when we present ourselves as one round. And internally. So we are very happy with that. Cinch is an informal synonym for EC in English. Can be spelled with an s or a z. And we think that's a very good beacon for us we want to be a company that is easy for customers to deal with and easy for any constituency to understand. That's something we use internally and externally for the way, for how we want to work. We also think it's good because it's unique If you Google Cinch, very few other companies are using it. So it's a very unique name. The fact that it remains easy, it's a differentiator. So we're very happy with the name and we're happy with the progress of launching this new brand, and we're getting good feedback from customers. On the next two slides, we're just showing a new website just how it looks. We're making it more value based, so speaking more to the value to the enterprises, to our end customers. And less about technical features because we believe we're bringing very large amounts of value to the enterprises. And therefore, we wanna display and show to the world how much value we actually provide and what we are actually doing. On the following slide, we're just showcasing the breadth of our product portfolio and given that we're now rebranded, we have it all on one page. And that makes it easier for customer understand, but it also showcases the breadth of the portfolio from SMS messaging to rich messaging through voice calling, video calling, number lookup, and video messaging or personalized messaging, verification, and all the way into our deep operator portfolio. So we're happy to be able to do this and happy to be able to present ourselves to customers in a more coherent way. Now let's move into the financial figures for Q4, and I will then leave the word to Obvelyn, our CFO. Thank you. Well, we were quite happy financially speaking with the fourth quarter. It was a good quarter for us, as I'm sure you've been able to see in the figures. We had a strong growth in gross profit, to almost SEK 310,000,000 Swedish counts during the quarter, also the adjusted EBITDA increased by the same amount really to by 56 percent to SEK109 1,000,000. We saw rising gross profit and EBITDA in all business units, which we're very happy with. You know, we've had some challenges in the operator division earlier in 2018 and, we now saw a very strong end of the end of the year also in the operating division as well as in Cinch, Cinch voice and video that is the unit that previously was called Cinch only. We see a considerable contribution in growth and profitability from the businesses we acquired in 2018 on wire and vehicle. We have started doing some increasing organic investments in OpEx in order to increase growth going forward, and that may impact our earnings in the coming year before we these new initiatives start translating into higher revenues and gross profit. But the bottom line here is that we feel confident. We had a good end of the year and, we see we see strong signals for the future. Moving forward, we saw rising volumes, we did see a slight increase in pricing per message, but we also see, saw a good growth in price in the number of transactions. Our 100 and mobile operator mobile mobile operator connections ensures that we have a very strong position versus our competitors where we can ensure high quality. Without kind of using any middleman. And we are particularly competitive, we believe, for enterprises at sound traffic to many different geographical areas. This way, in the gross the gross profit in the enterprise division increased by 40%, more than 40% due to new customers, new use cases, and continued growth on our existing customer base. Operational efficiency. The gross profit is obviously the primary bottom line growth for us. The gross profit, the gross margin is very much dependent on, where we send traffic, during 2018, we saw an increasing amount of traffic going to high margin markets, which had a positive impact Our operational efficiency is continued to be good. We still see potential for, for becoming more efficient forward, and that's part of the investments we do are focusing on achieving that. Then I'll with that, I'll give the word back to Oscar just a little bit about the, more detail about the gross profit. Okay. Thank you, Odd. So on the gross profit side, total growth of 55 percent, as you can see in this bridge, 15% or 16% of that came from acquisitions and from both unwire and vehicle. So we're seeing both of those developing well. When you have 39% of this is organic, where the enterprise divisions and primarily done in messaging, is the biggest contributor naturally. It is our biggest segment. This is partly driven by the U. S. The large big tech companies and partly by a broadening in the base. But we see a strong momentum in most areas. And I'm also very happy to report that our operator business had a good and solid Q4 and had a slower start to the year that came back good in the last quarter. So solid growth in the operator business. And as we see later, our voice and video business, which we acquired from the acquired entity that was previously called Anxinc, I mean, where we used to name for the entire company had a very solid Q4 as well. So it's good to see that all the areas that we're doing have good solid growth. I should comment on the reason that the gross profit is increasing more than revenue is due to, on the messaging side, we're increasing revenue to markets with high gross profits, but with low termination fees to operators such as China and the U. S. Which drives gross profit more than it drives revenue. It's also so that the voice and video business and the messaging business is doing well, which is higher margin businesses for us. So that's why you see a higher gross profit growth than revenue growth in this quarter. If we move to the next slide for adjusted EBITDA, We had a similar growth in adjusted EBITDA following the gross profit. As you know, it's gross profit that is our primary metric in the business, not revenue. So it's logical that adjusted EBITDA follow gross profit. You see a similar development here where acquisitions on wire and leak, it contributed to 23% of the growth. And the organic efforts to 33%. And you can see the split between enterprise, the operator, and the voice of the video business. So also here very good to see the strong year ending the operator business. The very, very, very good for me to see the the positive adjusted EBITDA in voice and video to the strong year end from voice and video. Then let's move to the next slide. And on the financial targets side, we have an target of doing adjusted EBITDA per share to grow 20% per year. And the net debt to be below 2 0.5 times adjusted EBITDA adjusted EBITDA over time. And the performance on the adjusted EBITDA per share it did grow 20% in Q4 2018 measured on a rolling 12 months basis. And the net debt to EBITDA was 1.1x measured on a rolling 12 months basis as well. So we're hitting our financial targets, which is of course good. On the next slide, we're showing and breaking out to the voice and video business, what was previously then called Cinch. Called Sing Chan hours were held, but since we took the name for the group, yeah, we need to keep the naming convention correct. And so the voice and video business, we saw, as you can see on this chart, a very strong Q44, driven by a set of large customers. And we have been working with this business a long time to make it profitable. And as you can see in Q4, we made that goal, which is, of course, very satisfactory to us. And it's driven by a strong effort and focus on the ride hailing segments. Where we do a number of asking service for a good portion of the big ride hailing companies. And it also driven by strong wins in the number verification segment. So obviously you see the strong growth We see good prospects for this business going forward, but we should maybe not draw the line straight up to the sky all the way, but we have a strong strong momentum in the business On the next slide, looking at the RCS part, if we look a little bit to the future, we see very strong and interesting trends happening in the rich messaging segments, which will affect and grow our messaging business. We choose in this call to talk a little bit about RCS and RCS is to put a simple and upgrade to SMS, which supports rich media. That is you can, instead of selling text strings, send some videos and pictures, It supports interruptivity so that you can instead of sending a one off text message to a brand, you can start a conversation with that brand. Which means that you can port a portion of the call center volume over to messaging. It includes opportunities for branding and verified centers. And so what happens here is basically you can get an at like experience sent to your inbox. So imagine if you in your pre installed inbox where you don't have need to have any down can get a message which functions like an app that will be very interesting for a lot of brands. And the reason is very simple. It's harder to get people to download apps and it's only the most your best customers that downloads our apps, but what about the rest? So this is, for example, if you would travel with Singapore Airlines, and you don't have the app downloaded, then you would get a check-in message to your inbox which would function just as if you had an app with them. And we believe this is very, very powerful for a lot of customer experience and customer interactions for a very large portion of the brands going forward. U. S. Is a driving market for this. AT and T and T Mobile have launched, and we expect Verizon to launch RCS in 2019. So we expect the first take off, for the All Access Technology and, or the U. S. Is going to be one of the first markets. One of the unknowns is Apple, which has not yet decided when they will launch. And so, so far, it works on the Android phones. But there are various various indications saying that Apples is working on it, but not confirmed. We expect full operator coverage in the U. S, UK and several other markets during 2019. So this is an indication of what we see going forward. This market is transforming. It is becoming the technology is becoming better and stronger for the enterprises. We believe in the at the baseline will drive growth for the market and thereby growth opportunities for us. Then move on to the last slide. We, how do we see future growth? Well, as we have communicated for a while now, we have strong pipeline and strong relations with several US based global tech companies. We see good effects from that in this quarter and we expect that to continue. As you've seen, we see considerable interest in personalized video. We have a lot of very interesting customer engagement in that area. We see more engagement in the number verification business as you saw in the voice and video numbers. And we see number masking for rate ride hailing with the future markets and customers set to go live to be a growth contributor also going forward. And the last one is what I commented on the previous slide. We're investing in rich media, conversational and messaging, which is both the RCS part, which I talked about before, the OTT chat outs such as WhatsApp or Facebook or WeChat, etcetera, which are capture, which are capturing market market growth potential and driving enterprises into new use cases. So us all in all, let's just say, very good market, a market with solid growth potential and a market where we're very well placed to capitalize on that future growth. Thank you very much, Oscar. And with that, we'll open up the 4 questions. Thank Please standby while we compile the Q and And our first question comes from the line of Daniel Gerberg from Handelsbanken. Please go ahead. You very much and good morning. Congratulations on the good gross profit growth. I have like to start with a question on the OpEx on the enterprise business. It was up quite much, of course, we knew a bit of this because you've told us about investments in R&D And Marketing Sales and recruiting, etcetera. But can you give us some more seasonality or how much was related to recruiting cost and so on. So how to think on 2019 in terms of OpEx Thank you, Daniel, and I'll lean on all the perhaps here at this as well. You're right that there is a seasonal component in our OpEx. Q3 OpEx is lower due to vacations. Q4 OpEx is higher in this quarter, not least because we have performance related variable pay, so bonuses for sales people. And as you can see, we ended the year on a very strong gross profit trajectory. And that results in higher costs for successful salespeople in our organization. So that's, that plays a part Other factors influencing OpEx like to highlight currencies, currencies affects us in two ways. Firstly, directly since we have operations overseas, for example, we have a large business in the U. S. And of course, that OpEx translates into more Kronos when the currency rates change. The second aspect that currencies affects us is that we have at any given point in time outstanding invoices, and payments due. We revalue on a rolling basis, so to speak. And in this quarter, that weighed on us negatively. I believe we specify that you may be able to find a little bit more on that in the report. $9,300,000 negative effect during the quarter from that sort of, tariff effect specifically. Exactly. So, and that, of course, if you think long term currencies are flat, that should should not be significant. It's not something that we take out from adjusted EBITDA. It is still a part of our ongoing business, positive and sometimes negative. For this quarter, it was a little more negative than normal. Other than that, if it's correct, we signal that we will make investments in order to drive gross profit and revenues. And I think to speak with the entire management team when we see this type of gross profit, we're very convinced that that's the right strategy. Yes. So we shouldn't consider any temporary hikes due to 3rd party consultants or any recruiting costs that we should consider that, Jyrki, they will this will disappear here or any major impact of that? No, I think we'll need to track this, of course, on an ongoing basis, the seasonal component, you're correct in that both recruitments and external consultants does play a part, but that can happen also in the future. Yes, of course. If I may, another question on RCS, perhaps if you will, that should know this already, but will you have the revenue recognition within enterprise or in Cinch voice and video? And also if you can tell us a little bit about the competitive landscape so far in RCS, I guess, if you are still early days, If I'll start with, with revenue recognition as we look today, that would end up in the Enterprise Division, but the market is still in an early phase, and it's not very material yet. On competition, what can we say there? On competition, generally, we are very strong. And it's not the strongest in the messaging space in the world. And so we have a very strong standing on that. This takes us into a little bit of a new type of messaging, which moves us closer to the brands. And so you see competition from the normal suspects and our current competitors. Do you also see a little bit more from the smaller ASPs in the market? Now that is naturally in the early part of the business, volumes have not gone up, and people have not taken their positions. So you see, quite a bit of players playing around on the other hand, I think, going forward that will iron out and to be a good market for us. We're not overly concerned about that competition. We want to long as we drive our own agenda in a strong way, we have good confidence that we take a good position in that market. Perfect. And my last question for now would be on Ciena's voice and video, obviously growing nicely with ride hailing and so on with number and whisky and the verification. Should we expect still we see a big seasonality that we should go down to red numbers in terms of profits in coming quarters? Or are we on a new level also in terms of profitability now? I think it's fair to say that we've reached a new level with the customers that we have. You know, parts of this, to be frank, is driven by key customers. Of course, that makes us a little more sensitive. But there's no particular seasonal components as we see it. We see more than sort of the effect of a structured effort towards targeted applications and vertical, which we're, of course, very happy with. So we should continue to see trendier rather than a one time swing into black numbers. That said, as Oscar alluded to, of course, if you extrapolate exponential curve, then, you break the top end of your chart. So we'll see how that develops, but we're very optimistic about Cinch force and Digi. Thank you. The next question comes from the line of Stefan Aber from Carnegie. Please go ahead. Hi, there. So you're stating that you're seeing an increase seeing gross profit per transaction. Now is that mainly a function of you leveraging your pricing power, or is it more a function of generally higher prices in the market or simply a matter of mix changes? Yes. So, a few different parts play here. I think what we see here is the consequence of our strong competitive position versus demanding large global enterprises who look to communicate and engage with their customers in a lot of different countries. So we take strategic customers, long processes, lot of work, and supply them a joint offer where we serve them in multiple products in multiple geographies. What happens then is that some markets will be more profitable than others, depending on the local competition in the markets we're terminating, messaging traffic to. So what we're seeing here is better profitability driven by our ability to serve a very demanding group of customers. That's one part of it. The other part is, like you said, that the traffic mix, when we terminate into countries like we increase our termination into countries like U. S. And China, which has a where operators charge a low fee, Then regardless if our gross profit per message is the same, if the operator charge is lower, the percentage gross margin is higher, right? And if we terminate into market, it would have a high operator fee, then regardless if our gross profit and that's is the same. The percentage gross margin becomes lower. So when the mix changes to markets such as US and China, our gross profit would also increase, which is, and I think that's 2 of the answers here to this quarter. We also have, like we said before, when we have strong growth in if we exclude messaging, when we have strong growth in in voice and video. It's typically a higher gross margin business. And when we have strong growth in personalized video, it's as higher gross margin business. So that will kind of ink up our gross margin. Then generally, as a general note, we're obviously working to add additional software layers and software services or source component on top of the termination which over time, if we do this well, becomes chargeable items or increases gross margin. So that's obviously our strategy to add more and more value to our enterprise customers. Thank And our next question comes from the line of Frederick Liffel from Danske Bank. Please go ahead. Thank you. Good morning. Thanks for taking the question. I have two or three questions maybe. Could we go back to the OpEx in Enterprise Division and try to single out so that the organic growth in there? How many people you're growing with that is actually sort of developing your services, selling your services? So we can exclude the seasonal effects in order to understand what level you're entering 2019 in. So that is really one question. And then, since voice and video did a very good quarter, came up to new level, is this Is this sort of a stepwise thing within this unit as they are sort of developing in new clients and when new clients are sort of starting to onboarding and, processing a lot of messages. Is it stepwise upwards? Or is it sort of that you have a strong organic growth in front of you now that we should sort of try to calibrate for here? Thank you. I'll answer the last one first. I think absolutely, we have growth ambitions for Cinch voice and video. We hope to see continued improvement in that business. Maybe a little bit more to that. And this is driven by a set of a large customer launching a set of countries. So when you are small, obviously, a large customer impact in a stepwise, but gradually as we grow, it's going to be less stepwise. And so we think we see strong, we see a strong pipe. We have launched a set of customers, and we hope to continue. And then just a correction, this is not messages at all. This is voice calls or video calls So just we're going to just reposition that correctly, this has nothing to do with messaging in that business. And on the general OpEx level, I think we can follow-up offline with details on headcount and so forth. Think that the overall picture, I think you have a mix here. You have slightly higher OpEx than we've perhaps expected, driven by seasonality and currency and bonuses, which we alluded to before, which puts Q4 at a higher OpEx level than other quarters would be. On the other hand, we've been very clear that when we see these growth opportunities in the market with potential for very high growth, we want to see those opportunities. So you'll have to sort of weigh these 2 against each other, for your forecasting purposes. Thank you. There are no further questions at this time. I would now like to hand back to the speakers. Well, with that, thank you all very much for listening in to this since Q4 twenty eighteen conference call. We look forward to a continued dialogue if any questions come up just don't hesitate and get in touch. Thank you very much. That does conclude our conference for today. Thank you for participating. You may disconnect.