Earnings Call: Q3 2018

Nov 6, 2018

Good day, and welcome to the CLX Communications AB interim Report January to September 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Thomas Heath, Head of Investor Relations. Please go ahead, sir. Good morning, everyone, and welcome to CLIC Communications Third Quarter Earnings Call. My name is Thomasy. I'm Chief Strategy Officer and Head of Investor Relations. With me on the call today is our President and CEO, Oscar Varner, and our CFO, Odd Bullin. With that, I'll hand the call over to Oscar for an update on the quarter. All right. Thank you. Welcome to Select earnings call. This is my first earnings call as the CEO of CLX. So I'm really looking forward to this journey. So the Q3 summary is, group organic revenue grew 13% in local currency. We had a gross profit up 26%. Due to both organic growth and success with M And A. We do see that our M and A transactions done in the previous year on years are developing then a favorable, a favorable. Adjusted EBITDA is up 33%. We see strong market growth in certain segments, and we see further growth opportunities both organically and through M And A. Our markets are developing to rich media and conversation messaging, where we see a lot of different interesting opportunities. We will therefore re bias our leverage policy to allow for 2.5 times net debt to EBITDA to support our M and A strategy. And as you can understand, we do see interesting M and A opportunities. And organic investments in OpEx may impact our earnings in the coming year before new initiatives translate into higher revenues and gross profit. So we see so many opportunities in the market in high growth segments that we want to ensure to capture in order to drive growth in the future. If we look at the organic growth initiatives, we see We see both sales and new product offerings offering opportunities that will drive organic revenue and gross profit growth. In a couple of different areas. The first one is internal automation and efficiency. We see relatively large opportunities to become more efficient by automation. We see product development around which media and conversation messaging. This market is developing favorably in many, many different areas, which were by market growth. And of course, as a market leader, we want to capture those increased growth opportunities. We've seen faster growth market for our personalized video message This is from the vehicle acquisition. We see a very strong pipeline with very solid customers there and that we want to capture the market And we see sales and marketing initiatives to drive direct sales and channel partner business. Both are direct sales to enterprise sales pipeline is improving favorably, and that we see strong channel partners that we're using as a go to market partners, where we have strong opportunities for growth. If you look a little bit on the messaging business, we have the enterprise division gross profit up 26%. On the Enterprise Division EBITDA, up 33%. The ATP messaging volume up 6% in year to year in comparable volumes or in comparable units. The difference there is partly M and A and partly that in this quarter, our gross profit per message improved more than the volume, if you will, in certain quarters. We have volume growing up more than gross profit. In this, in this quarter, we had gross profit going up in more volume, which I personally see as very positive, as very positive trend. You can see that trend in later slides. Let me have a commentary on the Slide number 6. For messaging. We have increased messaging traffic to certain high margin markets. And we see our markets are a little different in characteristics. Some are high margin percentage and some lower margin percentage in this quarter. We had increased traffic to the high margin markets. Typically, actually average gross profit per transaction is relatively similar between the markets, but since the underlying underlying cost structure in the markets are different. The percent margin in different markets may be different. We see that Unwire is continuing to perform well. And we're happy to see that that acquisition continuing to perform. And we see increased revenue in the vehicle personalized video, and with cross selling, both to operators in Europe we're taking the same business model from the customers in the U. S. With a very, very strong interest and uptake. So I strongly believe that the vehicle acquisition was a a very good move. We are in active dialogue and delivering significant volumes too in many of the U. S. Global tech companies, and we see that momentum strongly going forward. And we see that we both can add more traffic from our existing customers. And we are winning new ones. These projects are long time to market. I mean, it's very, very large customers. It takes some time to go to market, but we'll see we have a good traction on both winning new ones, increasing our market shares with ones that we have. We are focusing our forward looking investments on like I said before, rich media, conversational messaging, RCS, OTT chat apps and personalized video. So as you can see, we're moving from a much richer messaging portfolio gradually. And we see a good market uptake from that, and we see the market developing well. And we see that this will drive a market growth in the years to come due to that the messaging channel becomes richer and more interesting for enterprises to use. If we then look at real time voice and video business that we have. And so Cinch is continuing to build. It's build and invest in its real time voice and customer adaptations. We see our ride hailing business developing favorably with plans to launch number of maskings in further markets this year as we have a strong pipeline of good market for the number masking voice product. And we also have a strong pipe for the verification business with customers in multiple industries. We also do see improved cross selling where voice and video is marketed alongside messaging. So we see the kind of the cross selling between the different teams. And we have during the quarter integrated the teams more thoroughly with good effect also in customer engagements. Truly this becomes a, I mean, you want, as a customer, you want to both engage with us in voice and in real time voice and video or sorry, in messaging and real time voice and video. So that's a natural, but a very good development to see. If we then switch to Slide 8, Our operator division, the underlying business is developing as planned. We have continued improvement in EBITDA compared to Q1 and Q2 this year. We should note that the earnings in the 2017 Q3 is an unusually high quarter. Due to certain capacity expansion projects, which are periodic. So in 2017 or Q3 2017, we have had a very high earning due to some capacity expansions. So the comparison in operator becomes a little bit We have a strong sales pipeline, but unfortunately, too slow conversions to products and revenue in the operator division. And we're we're working to reach the 15% medium term EBITDA targets during 2019. And with that, we'll hand the word over to Aldi to run us through some of the numbers for the quarters. Thank you. Oscar, it's already given all the basics. We are quite happy with the development during the quarter. We have seen a considerable growth. We were very close to doing our first SEK 1,000,000,000 Swedish strong quarter and we believe that will happen soon, hopefully. We have seen a stable gross margin in our enterprise division. We also see an existing customers developing very well. The operator division, as Oscar pointed out, still suffering from some slow conversion of existing orders into revenue and projects vehicle is performing very well. If you go on to the next slide and look at the gross profit and the EBITDA quarter over quarter. Starting with the gross profit, We maintained the level we had in the 2nd quarter, even due to 3rd quarter seasonally is a slightly weaker quarter normally. We have a very good momentum with some key U. S. Clients, and as I said, vehicle continue to perform well. Do you see the effect of these effects on both EBITDA and gross profit? And I'm not gonna spend time on budget pictures in the future. So let's move on to the year over year comparison, both profit and EBITDA. What we can see what we can see here is that the part of the what we see as a solid organic growth underlying organic growth, we also had a significant contribution from the acquired businesses, on wire and vehicle. Both of them are performing very well. But we do have an unhealthy underlying organic growth, which is obviously a very important factor. Moving on to operational efficiency. Slide number 16. The gross profit is, as I'm sure all of you know, the primary bottom line driver for us, and gross profit per transaction asking as the traffic we've seen has increased to some high margin markets. The revenue and gross margin, however, at the end of the day, it depends very much on the mix of terminating markets. But this we've seen recently some increase in traffic to markets where we have a higher gross margin. Unless there are, well, we'll take all the questions afterwards, right? Yes. And then I'll get the word back to you also. Thanks. So we thought we'd spend a few minutes talking about our company in a wider setting, especially as Oscar's just joined as CEO. So with that, a few words on our overall story, Holger. Okay. So moving to the story. So must say I'm super excited to get into CNX and understanding the business and understanding the opportunities. I do believe that there are strong opportunities in many, many different areas for CNX. The way we see this is, if we look at slide at the CNX at the glance, We deliver customer engagement. So we're basically using mobile technology to help businesses engage people through mobile technology. And the bottom line to that is very simple. It's the mail channel is very hard to use. It doesn't work that well. Phone, hard, and TV advertising, all of these kind of other channels that you have is very hard, but then you have this channel direct to everybody's kind of pocket to the medium and to advise that always carry it with them. And that's obviously a very, very strong channel to the business. And that's or to the consumers. And that's basically why this market has grown so large over the last couple of years. And therefore, we address a growing multibillion U. S. Dollar markets, in both messaging and SMS and rich media formats in voice and in video. Counting this up, it's a large growing multibillion dollar US market. Interestingly, when I thought about this business, it has 100% penetration among consumers. I've asked everybody that I met since I started and I've yet to find one single person that has not been exposed to this type of services. So I've not found one single person that I met that has never receive the text message from, don't play through a doctor's appointment or here's your flight ticket or tracking information or delivery information or something like that. Or that have never made a voice call, for example, to an Uber app from an Uber app or any such other services. Or that has never done a real time video call. And for example, with a doctor. So So far, I'm not that one single person, so I'm kind of making the statement that it's roughly 100% consumer penetration among users in the world. It's the same type of penetration for this market as for mobile phones. And it's very, very few markets that has that characteristics. We reach 5,000,000,000 users worldwide, and we reach them within seconds. A typical statistic is that 90% of messages to mobile phones are that they're almost read within 9 per second? Sorry. 3 minutes. 3 minutes. So 9 to 10 for messages to month owners are within 3 minutes and reach 5,000,000,000. We deliver 25,000,000,000 transactions a year. That is 5 plus or engagements to each mobile phone globally in the world per year. If we take in our core market, that figure is going to be significantly higher. So we're probably in the U. S. And Europe, now, delivers on 10, 15 engagements to each mobile phones across all of those geographies per year. Customer sized is generally very high, due to that this type of asset is primarily integrated into the customer journeys of big enterprises. This is a an airline who wants to communicate, this is your ticket, that is not serious spam, or this is you wanting to contact the ride hailing business and you call them. That is not seen as spam. That's kind of part of your customer journey, part of your engagement with that business already. So customers have factors that are very high. And we see that cloud communications via mobile technology is becoming business critical and that it's moving from early adopter turn in majority. A large portion of our revenue as of today has been driven by the digital natives through online companies improving their customer journeys, and we see that kind of development going out into the mainstream. Our chairman was at the hairdresser the other day, and the text message from the hairdresser saying saying don't belate for your, don't belate for your appointment. And then he asked us to address it. So how does this work? What benefit does this give the address are answered. Well, you know, these type of messages, they reduce 2 no shows per week for me, and I pay whatever, $5 a week or something like that. And I think that's a very good kind of it's a very, very good example of how this type of business has really truly affect the no show reduction for the hairdresser on the corner And with that type of business, you have a very, very large addressable market. And to her, this hairdresser, the business case of using this type of services is an absolute no brainer, reducing kill no shows for the week for her is hardcore money and the cost to do so is very small compared to the benefit. And then you can imagine the amount of businesses that that will or are already engaging in this type of in this type of communication. We are one of the world leaders. We're leading communication platform for messaging motion video. So one of the leaders in this market. We are a preferred partner to the most most demanding enterprises. We're serving 8 out of 10 of the largest U. S. Big tech companies. You take a list of all the brands that you know, the biggest brands from the biggest tech brands from the U. S, we serve 8 out of 10. It's a very strong statement and it's the statement for our quality. And our ability to deliver this type of services on a global level. And the tick market for these companies, we're truly, truly top tier. And we also very interestingly do software solutions to mobile operators based on the same underlying platform. Which I think is a very strong point for us, which singles us out from the competition. And I do think there are increased opportunities for for corporations between these business units in the future. Moving to the next slide here, Slide 19. So Growth markets are focusing our main market, as you know, is messaging. And we believe that the market for messaging as of today is run about USD 10,000,000,000 or USD 10,000,000,000. There are market estimates vary between $10,000,000,000 $50,000,000,000. So there's no we you choose to take the lower part of this range to be conservative, but this is primarily text messaging And seeing a market, from a relatively simple technology, text messaging, growing to that size, that has something. And the reason is very simple, 100% consumer penetration, 98% open rate, and everybody is a trained user. So the power over the mobile channel, I think, is proven by this figure. What's happening now though is text messaging market is moving to richer media messaging and more conversational messaging, which will show a little bit later. Which we believe naturally, given that the messaging channel becomes more powerful, it will grow market growth in the coming years. Then we have another part of this market, which is traditionally called CPaaS or communication platform as a service. And this is basically when you add a layer of software intelligence on top of the actual messaging transaction. So first, as market was just send the message to my user, That's one part. But then you can also start to add a layer of software intelligence. And I was talking before about verification and number masking. So in the verification business, we would not we would sell, we verify that this number belongs to this user, but this mail address is connected to this phone number. There, we're having a service where we may first send out the text message, but if the text message is not answered to, we may make a voice call and then we may do something else. And we sell the actual verification, and we have added a software model on top that does that type of verification. Or in the number of asking business that I talked about before, we are not only connecting and delivering the voice call, but we also mask the number which for a ride hailing business is super important because if the number is not the most number means that the user don't know, which phone number the driver has, which is very important for a ride hailing business because otherwise users may contact the driver's direct in order to get the lower price. So that's a super business critical revenue short term feature for a ride hailing business. Or other such services. And in the CPaaS part that is adding the software layer, and there are various degrees of market estimate Uniper sees a 35% CAGR. Gartner expects a 50% and IDC forecast to 57% CAGR. We're seeing that this part of the business is growing strongly. We're seeing a large demand from our customers and this is where we obviously being a messaging leader here. Need to focus quite a bit of investment to capture this top end market growth in this type of segment. It's a very, very natural step for us being as comfortable as we are. Looking down to the next slide, I touched on this before. But in principle, do need it when I say it's a 100% consumer penetration. I estimate, need one single user that is not a one single person or consumer that is not used to suffer services. Which means that the use cases are infinite or the number of use cases that we're delivering and seeing the future, it very, very good to very, very long list. It can be banking, healthcare, internet commerce, utilities, media, ride hailing, transportation and travel. And I can probably go on and on and on here about the use cases we are delivering and then can deliver in the future here, because a very large portion of the world's enterprises can actually be our customers or our channel partners. We're also seeing growth here. I think we're seeing French shift in the Waller CNX where we're moving a broader set of services, than, than messaging, both from SNSA and to more than messaging and also rich and media messaging. And so I'm going to talk a little bit about those. So voice and video, So we're doing cloud based capabilities for voice and lead time video. That is somebody has an app. Sorry about that. Somebody has an app. And they want to make a call from that app. It's that type of calling system is something that we do deliver. And we see that we can win the world's largest brands on this type of on this type of services as well. So we're seeing the top brands in the world actually coming to us, on the voice business as well, which is very, very possible, positive. And we're focusing very much on the ride hailing business. We have traction in that business. So we're focusing on penetrating that market selectively. On the year, like I said, we're doing number masking, with temporary phone numbers in which safeguards, safeguard privacy and improves revenue assurance for right businesses. The other very interesting area is personalized video, where we have a unique personalized video to each recipient? This is if you say messaging 1.00 and 1.05, we would say instead of sending a text message, we're doing this primarily in the U. S. Today. We're sending a video message. Unfortunately, I cannot show this video on the call here today, but it's a very powerful video. And so we work with customers, they map out the customer journey and instead of sending a text message, the users receive a video message into their inbox. And we have worked this through a couple of big companies, and we see Very good starts from this. Sorry about that. I caught a cold. Sorry about that. So during this type of video message, we see a a 17% annualized churn reductions for a major U. S. Valued wireless carrier. So they are basically they mapped up their customer journey and they said, all right, I have an issue with the customers not understanding my phone bill, So then they mapped out and said, let's send the personalized video message, describing the lines of the phone bill to the users when they receive their device. And this video message explains the phone bill to the users and thereby reducing churn. And with 17%. And you can imagine, to an operator, reducing charge of 17% is a huge amount of money, And churn reduction is the most important metric for the marketing organization of the carrier. And you can imagine many carriers we can sell this to, but if you expand this, how many subscription based businesses can we sell these type of services to, And I think the list there is very, very long as well as received by the pipeline. It also has the highest improvement in F Promoter Score, of any marketing effort that this client has done in the last year, due to this being a very, very direct message. The interesting thing here, what we mean by personalized is that we actually on the fly create different variations of this message. Actually connect into the CRM of this particular carrier and pick up while user A has selected product A, B, and C And there we on the fly create a personalized message to this and the personalized message to this carrier. And so it has 36 different variations of the video, making it very, very directly targeted to this innovative user. So I think this is very, very powerful. The next thing that we see is next generation messaging. If we move to the next slide, Slide 13, We call this the post up area era. As we're seeing new messaging formats coming out, So basically having, messaging formats where you can both do read, come feedback or you can have a conversation with the brand. So it's not only a one off like text messages. It is a you can have a conversation with the brand in a chat like experience. And as you know, the younger generation, they prefer, you know, chatting or messaging based communications or the voice based communications. So that type of communication in the customer journey in a message being very very powerful. It also provides at which style of the content, so it can have pictures or videos like you saw in the in the previous slide. And it becomes an app like experience. So you can actually have buttons or action buttons in the message. So imagine your phone and in your inbox, you get a almost when you click on that message, you get Internet. So you no longer need to download the app because suddenly you get a text message in the right time targeted to you only with the right information for the thing that you want to do right now, and it looks like an app. So take on the message you would look in an airline case, it would look a little bit like this, boom, check-in or change sheet. You have that directly available in your inbox. A large portion of our customers believe that this will replace, a portion of the app traffic because the 27th airline you have, you don't download the app. You just want to get the message through inbox and have the same type of experience like now. So the post app era is something that's discussed highly in the customer excellence, customer journey organizations when you present this type of messaging formats to them? So obviously seeing both voice growth and then personalized video and this next generation messaging formats, we see strong market growth in the coming years, and then we see a very interesting development for this market going forward. So future growth, And like we said before, we have a strong pipeline with several U. S.-based global digital native companies. These are core one of our core base We have a lot of customers, but we see we're very strong with the world's largest enterprises. We see considerable interest in increasing revenue vehicle personalized video. We see the Cinch business that we acquired before was the number masking for ride hailing developing well. And we also see an improving pipeline and key customer engagements for the same number of verification business. And we see us investing in the rich media, conversational messaging, RCS and all the teach shutdowns, and it's a necessity to capture the market growth potential going forward and something that you feel very strongly will do in the coming quarters. Thank you, Oscar. And with that, we'll open up for Q session. You. We will take our first question from Stephane Eber from Energy. Please go ahead. Your line is open. Hi, good morning. So I'm looking at the operator division. I hope you can help me understand how think about how future proof is. For example, how much of sales year to date in the operator division relates to legacy products that won't recur when networks modernize and how much of the sales do you believe will remain and possibly grow over the next few years, for example, a software for fraud and security. And also on operators, the Q3 margin was above the 15% you are targeting, is there any particular reason for that? So, a question relating to our operator division. You'll know from previous press releases, we've focused our agenda somewhat in our operator division, moving away from certain areas and focusing on areas where we feel we have a stronger offer. Generally speaking, our product portfolio has a mix of maturity level, if you so like. Some aspects are forever. Our products around security and signaling and so forth. Some are more tied to to a particular technology. I think it's worth highlighting the very or extremely long, sort of timelines in this type of business if we compare to our other business. These are not operators do not make swift decisions. And these businesses sort of tick on for a very long time. When we, when we look at this particular quarter, we see orders, good orders from a few select customers. That's the sort of normal name of the game. We'll have some variation between quarters. We're glad to see an underlying improvement over the past few quarters and we work to reach our 15 percent EBITDA target. So fill in a little bit about that, we do see an explorer, interesting future opportunity, which are combining the operator business and the enterprise divestiture business in a better way. And that is also recent position by Feltkor and IOT even made those decisions. We see opportunities in aligning those business in a better way where they, frankly, 1+1 equals 3 in a better way. But that's our focus right now on aligning this organization. Kettle talk a check about what this that is right now, but we're exploring a couple of opportunities for that. Okay. Thank you. And my second question relates to raising the gearing target. Does that mean that you have circled in on a potential target? And if you you don't want to answer that, I have more general question on this topic. What type of companies are you mainly looking at? At this moment? Is it expanding your current portfolio offering by adding new services or functionalities Or is it more bolt on acquisitions, both in new in an existing market, but also expanding to new geographies? It's well focused agenda. We have mainly 3 three focus areas. 1 is the bolt on acquisitions expanding EBITDA growth volume size. The other one is the new technology or go to market. I think vehicle or Cinch. And the third one is geographical market access where we may, if you want to target a specific geographical area, acquiring a team or a company in that geographical area. Which one of the three focus areas do you find most interesting right now? All of the above, that's why we have them. I think, all of the above, when we selected between the long list of different focus area, these are the top 3 which of them we find most interesting. I mean, it's interesting in a couple of different categories, how we execute in that agenda is obviously also where do we find targets at a suitable price that has the right characteristic. So So it's very hard to answer that question. They all have various interest in different ways. Okay. Thank you. That's it for me for now. As you can see from before, I mean, if we talk about the post acquisitions, Only, I mean, we're done. I mean, if we think about the EMLOC acquisition, fantastic acquisition, bring it in, I think that you putting us on a global scale, making us much bigger. That's more on the bolt on scale or also geographical axis. That's probably these 2. Of course, that was the right decision for us to do. If you look at the vehicle and lead time voice, we did those adding products and adding go to market into new markets. And so one of these 3, if we take those are very good acquisitions, but having a strategy to only execute on one time, Jim, I think, would be the wrong strategy. And the strategy should be to kind of take the market position and the right market position and then you need to execute on 7 different aspects. So saying that one is the only priority, I think, is is a limited strategy. Perfect. Thank you. Thank We'll take our next question from Frederic Litol from Danske Bank. Please go ahead. Thank you. Good morning. I just have a question on maybe two questions, but the first one is really on your wording around your, you want to push up investments and that may impact your earnings the coming year. Can you sort of translate that into the divisions you have and where we should sort of expect you to maybe increase the pace of investments. And in combination with that, the earlier sort of acquisitions you have taken on and now the Nova platform since last winter being fully in place. Do you have any further sort of efficiencies to to take out from those earlier M and As or are we fully done in terms of the costs you have in the quarter? Thank you. So I think the Oscar mentioned a few areas on Slide 4 in the deck. It's correct that we've migrated our traffic to a new transaction platform that's truly built for scale. That doesn't mean we're by any means finished in targeting internal internal efficiency and driving automation. So absolutely, a share of our efforts here will be focusing on areas, which just improve our business as it looks today. Then the second focus area is messaging in a broader sense. We talked about conversational messaging, about handling rich media, It's more complex for an enterprise to handle and send a rich media message and deal with replies than it is to send a text string. There are various take assets around that that you need to need to provide in order to to enable customers to use this successfully. We'll continue to work on that. We talked about personalized video messaging, which is both products, but also a lot of go to market. It's a as a product, which is receiving rave reviews whenever we go to clients with it. So that's a sort of simpler go to market sales investment. And lastly, it's an overall effort in improving our marketing branding position and channel partner business. So we see genuinely quite a lot of opportunities mainly messaging, also real time voice and video, and we think those opportunities are larger it's enough of a scope that we want to concentrate our investments on these areas. I think it's It's a very natural move. I mean, you see certain market segments like we've mentioned the CPaaS out of software, software intelligence growing with 35% to 50%, 60% per year. I mean, it's all and us being the there or one of the messaging leaders in the world. It's an obvious focus area to capture part of that market growth. And in such type of markets, obviously, you know, growing that fast, but it's need to be on your toes in order to capture market I think it's a very natural step to take a portion of the EBITDA growth to invest in those type of markets to drive further growth in the business. It appears there are no further questions at this time. I would like to turn the conference back to the host for any additional or closing remarks. Well, thank you everyone for calling in. Listening to our story, I'm seeing our progress very glad and warmly welcome to our next event. That will be Q4 Oscar, if you want any other last final remark? No, my last color market for me, I'm very excited about this business coming into an area, which has, like I said, 100% consumer penetration, is very interesting. Seeing the type of market growth that we're seeing is very exciting and seeing the type of customers that we engage with and the volumes that they cast mercengage with, it's a very strong position to be in. And I'm looking forward to drive the business further in the coming quarters. And hope to see you all in the next earnings call. Thanks a lot. Thank you very much. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.