Good morning, ladies and gentlemen, thank you for standing by. Welcome to today's end of year report, January to December 2018 conference call. At this time, all participants are in a listen only mode. There will be a presentation, followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I must advise you this conference is being recorded today on Friday, February 22, 2019. I'll now hand the conference to its first speaker today, Thomas Heath. Please go ahead.
Good morning, everyone, warmly welcome to Sinch Q4 2018 conference call. My name is Thomas Heath, I'm Chief Strategy Officer and Head of Investor Relations. With me today, I have our CEO, Oscar Werner, and our CFO, Odd Bolin. With that, I'll hand the word over to Oscar.
Okay, warmly welcome from me as well. Let's kick off. We'll give a few overview slides first and then dive straight into the financial figures. On the slide Sinch at 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 three minutes. That is better than any other platform that we know of, if you compare with email, for example. Using that for engaging customers is very effective. This is a cloud communications platform, and you can use it for messaging, voice or video.
The type of services we offer have a 100% consumer penetration, meaning practically every one of the adult population in the Western world are using this type of services. Anybody that you meet on the street have gotten a don't be late for your doctor's appointment, they have a call, a ride-hailing company via an app, or they have used a video service to connect to their doctor or something like that. It's a very widespread, very high penetration market. It is also a growing global multi-billion dollar market. Any way you look at it's a large market. Any way you look at it's growing with good figures.
We serve eight out of 10 of the largest U.S. tech companies. As a company, we 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 platform. We have a deep technical competence all the way down through the stack to mobile operators and all the way up to enterprise.
Okay. If we go to the next slide. Very short, just showing growth markets. Here we're just showing the messaging part and the CPaaS part. We're not showing the voice and video on this slide just to avoid too much text. The application to person messaging market is around about SEK 10 billion. There are third-party market estimates vary between SEK 10 billion and SEK 50 billion. We prefer to take the most conservative estimate.
We have the CPaaS market, which you can see as the additional services that you can do on top of the transportation layer. 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 grows between 30% and 60%. As you may have seen, we have done a successful rebrand from four brands into one. We were in situation, we had four brands in the market, CLX, Symsoft, Sinch and Vehicle.
We wanted to unify both for our customers to make it easier, and also internally to use it as a morale increase, a morale booster. We have decided to launch the brand Sinch, 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 us when we present ourselves as one brand, and internally. We are very happy with that. Sinch is an informal synonym for easy in English, can be spelled with an S or a Z. 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 how we want to work. We also think it's good because it's unique. If you Google Sinch, very few other companies are using it, so it's a very unique name. The fact that it means easy, it's a differentiator.
We're very happy with the name, 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 bring very large amounts of values to the enterprises, and therefore we want to 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 now rebranded, we have it all on one page.
That makes it easier for customer understand, but it also showcases the breadth of the portfolio from SMS messaging, to richer messaging, to voice calling, video calling, number lookup, video messaging or personalized messaging, verification, and all the way into our deep operator portfolio. We're happy to be able to do this and happy to be able to present ourselves to customers in a more coherent way. Let's move into the financial figures for Q4, I will then leave the word to Odd Bolin, our CFO.
Thank you. 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 million during the quarter. Also, the adjusted EBITDA increased by the same amount really, by 56% to SEK 109 million. We saw a rise in gross profit and EBITDA in all business units, which we're very happy with.
As you know, we've had some challenges in the operator division earlier in 2018, we now saw a very strong end of the year also in the operator division as well as in Sinch. Sinch Voice and Video that is, the unit that previously was called Sinch only. We see a considerable contribution in growth and profitability from the businesses we acquired in 2018, Unwire and Vehicle.
We have started doing some increasing organic investments in OPEX in order to increase growth going forward. That may impact our earnings in the coming year before these new initiatives start translating into higher revenues and gross profit. The bottom line here is that we feel confident, we had a good end of the year, we see strong signals for the future. Moving forward, we saw rising volumes. We did see a slight increase in pricing per message, we also saw a good growth in the number of transactions. Our hundreds of mobile operator connections ensures that we have a very strong position versus our competitors, where we can ensure high quality without using any middlemen. We are particularly competitive, we believe, for enterprises that send traffic to many different geographical areas.
We saw 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. Next slide. Operational efficiency. The gross profit is obviously the primary bottom line driver for us. 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 continued to be good, we still see potential for becoming more efficient going forward, that's part of the investments we do are focusing on achieving that. 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. On the gross profit side, total growth of 55%. As you can see in this bridge, 16% of that came from acquisitions, from both Unwire and Vehicle, as we are seeing both of those developing well. You have 39% of this is organic, where the enterprise divisions and primarily the 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. I am also very happy to report that our operator business had a good and solid Q4, and had a slower start to the year, but came back good in the last quarter. Solid growth in the operator business.
As we see later, our voice and video business, which we acquired from the acquired entity that was previously called Sinch, where we used the name for the entire company, had a very solid Q4 as well. It's good to see that all the areas that we're doing have a 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 profit 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 that the voice and video business and the personalized messaging business is doing well, which is higher margin businesses for us. 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. It's logical that adjusted EBITDA follow gross profit. You see a similar development here, where acquisitions Unwire and Vehicle contributed to 23% of the growth, and the organic efforts to 33%. You can see the split between enterprise, the operator, and the voice and the video business. Also here, very good to see the strong year-end in the operator business and very good for me to see the positive adjusted EBITDA in voice and video, to see the strong year-end from voice and video. Let's move to the next slide.
On the financial targets side, we have a target of doing adjusted EBITDA per share to grow 20% per year, and the net debt to be below 2.5 times. Adjusted EBITDA over time. The performance on the adjusted EBITDA per share, it did grow 20% in Q4 2018, measured on a rolling 12-month basis. The net debt to EBITDA was 1.1x, measured on a rolling 12-month basis as well. We're hitting our financial targets, which is, of course, good. On the next slide, we're showing and breaking out the voice and video business, what was previously then called Sinch. It's called Sinch now as well, but since we took the name for the group, we need to keep the naming convention correct.
The voice and video business, we saw, as you can see on this chart, a very strong Q4, driven by a set of large customers. 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. It's driven by a strong effort and focus on the ride hailing segments, where we do a number masking service for a good portion of the big ride hailing companies. It also driven by strong wins in the number verification segment. Obviously, you see the strong growth. We see good prospects for this business going forward. We should maybe not draw the line straight up to the sky all the way.
We have a strong momentum in the business, and we're very happy with the result going forward. 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 quarter call to talk a little bit about RCS. RCS is, to put it simple, an upgrade to SMS, which supports rich media.
That is, you can, instead of sending text strings, send videos and pictures. It supports interactivity 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 senders.
What happens here is basically you can get an app-like experience sent to your inbox. Imagine if you, in your pre-installed inbox, where you don't need to have any downloads, 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 hard to get people to download apps, and it's only your best customers that downloads apps. What about the rest?
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. We believe this is 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&T and T-Mobile have launched, and we expect Verizon to launch RCS in 2019. We expect the first takeoff for the RCS technology, or the U.S. is going to be one of the first markets. One of the unknowns is Apple, which have not yet decided when they will launch. So far it works on the Android phones.
There are various indications saying that Apple is working on it, but not confirmed. We expect full operator coverage in the U.S., U.K., and several other markets during 2019. This is an indication of what we see going forward. This market is transforming. The technology is becoming better and stronger for the enterprises, which we believe at the baseline will drive growth for the market, and thereby growth opportunities for us. Move on to the last slide.
How do we see future growth? Well, as we have communicated for a while now, we have a strong pipeline and strong relations with several U.S.-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. We see number masking for ride hailing with future markets and customers set to go live to be a growth contributor also going forward. The last one is what I commented on the previous slide.
We're investing in rich media conversational messaging, which is both the RCS part, which I talked about before, and the OTT chat apps such as WhatsApp or Facebook or WeChat, et cetera, which are capturing market growth potential and driving enterprises into new use cases. To us, all in all, this is a 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. With that, we'll open up for questions.
Thank you, ladies and gentlemen. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, please press star and one if you wish to ask a question. Our first question comes on the line of Daniel Djurberg from Handelsbanken. Please go ahead.
Thank you very much, and good morning, and congratulations on the good gross profit growth. I would 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 told us about investment in R&D and marketing, sales and recruiting, et cetera. Can you give us some more seasonality or how much was related to recruiting costs and so on? How to think on 2019 in terms of OpEx?
Thank you, Daniel. I'll lean on Odd perhaps here a bit 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 salespeople. 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. That plays a part. Other factors influencing OpEx, I'd like to highlight currencies. Currencies affect 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 kronas when the currency rates change.
The second aspect that currencies affect us is that we have, at any given point in time, outstanding invoices and payments due, which we revalue on a rolling basis, so to speak. 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.
SEK 9.3 million negative effect during the quarter from that sort of currency effect specifically.
Yeah, exactly. That, of course, if you think long term, currencies are flat, that should not be significant. It is 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, I think it is correct. We signal that we will make investments in order to drive gross profit and revenues. I think I can speak for the entire management team when we see this type of gross profit, we are very convinced that that is the right strategy.
Yeah. We should not consider it any temporary hike due to third-party consultants or any recruiting cost that we should consider that, okay, this will disappear here or any major impact of that.
I think we will need to track this, of course, on an ongoing basis, the seasonal component. You are correct in that both recruitment and external consultants does play a part, but that can happen also in the future.
Yeah, of course. If I may, another question on RCS. Perhaps if you will, perhaps should know this already, but will you have the revenue recognition within enterprise or in Sinch Voice and Video? Also, if you can tell us a little bit of the competitive landscape so far in RCS, I guess it is still early days.
If I'll start with revenue recognition. As we look here 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, if not the strongest in the messaging space in the world. 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. You see competition from the normal suspects and our current competitors. You also see a little bit more from the smaller ASPs in the market. Now, that is naturally in the early part of a business, volumes have not gone up, and people have not taken their positions. You see quite a bit of players playing around. On the other hand, I think, going forward, that will iron out to be a good market for us. We're not overly concerned about that competition.
As 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. My last question for now would be on Sinch Voice and Video, obviously growing nicely with ride hailing and so on, with number masking and verification. Should we expect still that 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. 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 component as we see it. We see more the effect of a structured effort towards targeted applications and vertical, which we're, of course, very happy with. We should continue to see a positive trend there rather than a one-time swing into black numbers. That said, as Oscar alluded to, of course, if you extrapolate an exponential curve, then you break the top end of your chart. We'll see how that develops, but we're very optimistic about Sinch Voice and Video.
Sounds great, and good luck here in 2019. Thank you.
Thank you.
Thank you. The next question comes online, Stefan Aber from Carnegie Investment Bank. Please go ahead.
Hi there. You're stating that you're seeing an increase in gross profit per transaction. 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?
Yeah. A few different parts at 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. 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 is that some markets will be more profitable than others, depending on the local competition in the markets we're terminating messaging traffic to. 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, the traffic mix. When we increase our termination into countries like U.S. and China, where operators charge a low fee, regardless if our gross profit per message is the same, since the operator charge is lower, the percentage gross margin is higher, right? If we terminate into market, which has a high operator fee, regardless if our gross profit message is the same, the percentage gross margin becomes lower.
When the mix changes to markets such as U.S. and China, our gross profit would also increase. I think that's two 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 voice and video, it's typically a higher gross margin business.
We have strong growth in personalized video. It's this higher gross margin business, that will ink up our gross margin. As a general note, we're obviously working to add additional software layers and software services or SaaS component on top of the termination, which over time, if we do this well, becomes chargeable items or increases gross margin. That's obviously our strategy to add more and more value to our enterprise customers.
Brilliant. That's very helpful. Thank you.
Thank you. Once again, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Our next question comes on the line of Fredrik Lithell 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 developing your services and selling your services, so we can exclude the seasonal effects in order to understand what level you're entering 2019 in. That is really one question.
Then Sinch Voice and Video did a very good quarter, came up to a new level. Is this a stepwise thing within this unit as they are developing and new clients and when new clients are starting to onboarding and processing a lot of messages? Is it stepwise upwards or is it that you have a strong organic growth in front of you now that we should try to calibrate for here?
Thank you.
I'll answer the last one first. I think, absolutely, we have growth ambitions for Sinch Voice and Video. We hope to see continued improvement in that business. Maybe a little bit more to that. This is driven by a set of a large customer launching a set of countries. When you are small, obviously a large customer impacts in a stepwise, but gradually as we grow, it's going to be less stepwise.
We think we see a strong pipe, we have launched a set of customers, and we hope to continue. Just a correction, this is not messages at all. This is voice calls or video calls. Just so we position that correctly, this has nothing to do with messaging in that business. On the general OpEx level, I think we can follow up offline with details on headcount and so forth.
I think that the overall picture, I think you have a mix here. You have slightly higher OpEx than we'd 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 seize those opportunities. You'll have to weigh these two against each other for your forecasting purposes.
Thank you.
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 Sinch Q4 2018 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.
Thank you. That does conclude our conference for today. Thank you for participating. You may disconnect.