Earnings Call: Q2 2018

Jul 20, 2018

Please go ahead. Ladies and gentlemen, warmly welcome to CLX Communications q22 2018 conference call. On the call today, we have Johan Hereby, our President and CEO, Od Bullin, our Chief Financial Officer and My Sales, Thomasy, Head of Strategy And Investor Relations. With that introduction, I'll hand it over to you, Juan. Thank you, Thomas. Good morning, and welcome to CLEC Q2 earnings call. So just a quick overview of the CLX group before we dive into the quarter. CLX is the global leader in Enterprise Messaging. Through our service, businesses can reach 5000000000 users instantly across the globe. We are investing in communication platform as service, adding new services to our offering like voice and video. And CPaaS allows enterprises to easily embed communications into its applications. We have an impressive customer list across the globe, some of the largest enterprises in the world are our customers. They have demanding needs that we fulfill among others adding, for example, GDPR support to our service. We also have a operator division, supplying software to mobile operators in the group. Today, using our services, enterprises send 25,000,000,000 messages per year. That is the scale we are at currently. Enterprises use our service for many different use cases. To improve processes to reduce cost or for marketing to drive sales. We see new use cases added every week. And it's fascinating to see how enterprises use our cloud based APIs to drive efficiencies or new So jumping into the 2018 Q2 highlights, we grew organically revenues 18% in local currencies, Gross profit up 30%, both due to organic growth and successful M and A. Adjusted EBITDA up 32%. See a strong performance in the Enterprise Division, a slight improvement in the operator division versus last quarter, on EBITDA. On Cinch, we continue to focus on the ride hailing segment. Unwire acquisition has been very successful from a financial standpoint and developing better than expected. We're also seeing and very excited about the vehicle acquisition and start to see some revenue synergies already now from that acquisition. So diving into the enterprise division. So continued growth in messaging traffic, both from new and existing customers. M blocks and dialogue traffic successfully migrated onto the new Nova platform, and that's a big milestone for the business. Have a strong pipeline especially in the U. S, both with Global Tech Companies, but also throughout the value chain with application service providers and more traditional enterprises like banks. We see a flat or slightly higher OpEx ahead as resources from the Nova platform project are redirected to product development and new sales and also to specific customer project implementations. So over the last couple of years, we've seen a dramatic uptake in transactions. On our platform and also in revenues and gross profit. Out of the 10 biggest U. S. Tech companies, we have signed a We now have large traffic from 5 of them up from 4 in the last quarter. We're seeing in this quarter, very pleased to see growth in both traffic volumes and gross profit. Total traffic volumes up around 21% in this quarter, including on wire. And then some comments on the operator division. The underlying business is developed as planned. We see a slight EBITDA improvement from First Quarter No significant capacity expansion contributed to the result in this quarter. We have a good strong sales pipeline, but at the moment, it's a slower conversion to projects and revenues. We're seeing slight improvements. We expect slight improvements for second half of twenty eighteen. And work ongoing to reach our target of 15 percent EBITDA margin as earlier communicated. And some comments on Cinch and vehicle. Cinch is continuing to invest in the broadening and offering to the marketplace. We are performing some customer adaptations to large ride hailing customers in the marketplace. We're seeing strong interest in the vehicle offering, especially with mobile operators on a global basis, but also from enterprises where we target in North America. And we expect to see a breakthrough in revenues in H2 from the ride hailing segment. Where we currently are seeing an increased activity level. Good. And with that, I will hand over to Odd for a deep dive into the financials. Thank you. Good morning, everyone. I'll start by just mentioning a little bit more about vehicle We had an initial purchase price of $8,000,000 that we paid later. We paid another 4,000,000 as an earn out now in July, due to the positive performance the company has and showed during this period. And we have also another upcoming potential earn out of another of a total of $18,000,000 over the next years if growth targets are met. We have seen a very positive development recently that has last minute, it's more, positive about the potential the company actually meeting this very aggressive target. And pocusy that they will be making this way that we will, be forced to actually pay out this money. All right. Let's talk a little bit about a little bit about the quarter as such. As Johan has mentioned, gross profit increased considerably. And that was due to both acquisitions and organic growth. Organic you have seen, slightly better prices in some markets. We've seen good profitability in some large Leadership based companies traffic. And that has contributed to the considerable organic growth that was It was a record quarter for us. Adjusted EBITDA of $97,000,000 was higher than we've ever seen before. So we're quite happy with that. EBITDA was 1,000,000 with an EBIT of 1,000,000 the difference between EBIT and EBITDA is almost entirely due to the fact that we are doing depreciation of customer and supplier relationships from former acquisitions, and there's obviously not cash flow impacting cash flow. Net profit for the quarter was $29,000,000 with a tax rate of slightly more than 30%. That is due to the fact that we had some non deductible costs for acquisitions and also the fact that we some tax less cost workovers in the UK that we are not utilizing at the moment, those are from the dialer acquisition, they're not very large. And we are in the process of confirming whether we can use someone but temporary gives us a slight higher taxes. The operated edition is improving, although the conversion of pipeline revenue is still impacting the slower conversion that we've seen during the winter and in Spain, it's still impacting the figures. Station vehicle are developing a plan, Nicholas is, as I mentioned, we got it going very well. We're very happy and satisfied with our techs too. And we will reallocate some of the resources from the Nova project in order to drive future growth. Looking at the diagram on page 12, the gross profit quarter over quarter, in cities that acquisition has increased our gross profit by 13% while organic growth has contributed 11%. We have very strong momentum in unwire, where we see the considerable gross profit contribution. And then once again, some launch used clients have probably organic growth. We've seen good gross margin development at this time over the quarter. Looking at the EBITDA, bridge, the organic growth is 28%. Most of that obviously came from the enterprise division We have a little bit of, close to 0, but we do see improvement going forward. Located on a year over year basis. Acquisitions have contributed the lion's share of the growth 18% while organic purchasing 12%. And on the EBITDA level organic growth has been 6%. This is a increasing OpEx That is, an effectively 31 of Nova project. Just a few words about key metrics that we're using. In that price activation, gross profit is the most important metrics for us as we have explained several times gross margins. Is very much dependent on the traffic mix that we see, which is out of our control. Gross profit, absolute gross profit is our key metrics. Adjusted EBITDA to gross profit measures the operational efficiency and we see a continuing good tender. OpEx for transaction is also important. We need, and we want to be a low have lower costs per transaction than our competitors. So an efficient process efficient processes and systems and large scale. Operating division, we measure revenue and EBITDA. And, in the new investments, as switching vehicle, we measure gross profit growth. Now looking at those figures, we've been more operational efficiency we do see a continuing good trend in EBITDA to gross profit and also applicable transaction. We do believe that even though we will use some of the resources that has been used for the Nova project for further development. OpEx per transaction will continue to show a falling trend. So with that, I'll give the word back to you on. So Q2 was a strong and successful quarter for CLX. And we see good potential for future growth. Mainly driven by strong pipeline, with some of the largest digital native companies, tech companies in the world. So today, we have 5 out of 8 live. We target to have 2 additional live in 2018. But we also have a very strong pipeline overall in North America, not only from Big Tex. Since, for the rate hyaline segment, we expect to see larger revenues from this in H2. 2018. We're seeing good interest and increasing interest from the personalized messaging video experience that we are called provide. And we are using now our mobile operator relationships and also cross selling back to our enterprise customer base. And having good conversations in that area and around that service. We also see RCS, especially in North America, probably not revenues that we will see in 2018 or that also will be small But for 2019, this is a growth area, we believe, for us. We're also coming out of the Nova platform project. So now we have most of our customers on one platform. It's been a long and project for us that is now finalized. And now having all customers, almost all customers on one platform means will get more efficient. So I'm confident that this will result in development on gross profit, both through higher sales, but also through some reductions in COGS as we optimize our network. Good. So more words on the personalized messaging video experience from vehicle. And this is a service that is rendered in real time where you take customer information from an enterprise and create a personalized experience for the customer. We also see this as a stepping stone through a richer media experience as a stepping stone to RCS. The first use case in the marketplace that have adopted this is onboarding of new customers as a Velcom message, but also to educate them about the service and invoicing processes. And as I said earlier, the focus are on mobile operators globally and enterprises in North America. Finalizing this call with some words on RCS. It's a very powerful, I would say, extension to SMS, both through rich media and the functionality that you can use. It will be much more of conversational experience. Can to some extent replace applications apps on smartphones. We expect roll out to have all mobile operators on board in late 2018 in the U. S. And then gradually roll out over the next 2 to 3 years across the globe. There are still some hurdles to overcome. We're expecting Apple to make an announcement on RCS, hopefully, in 2018. But this could be a major revenue contributor for CLX over the coming next years. All right. So with that, we will finalize the presentation. And I'll hand over to Thomas to, for Q And A. Thank you very much, Johan, and thank you, Odd. I'll hand over to the operator, and we're glad to take any questions you might have. Thank you. We'll now take our first question from Skason Abberg of Carnegie. Please go ahead. You talked about the new major US based tech company that has begun to use your platform, which you state contributes to the strong organic growth in the quarter. Now in more general terms for these types of large international tech companies, how long does it usually take before they have fully ramped up? Is it a matter of 1 or 2 quarters or could this potentially contribute to growth for a longer period for one single client? I think it varies a little bit depending on who it is, but we see continuous ramp up over several quarters. So it's not only 1 to 2 quarters. In general. So I think it's about establishing trust and grow that trust over over a period of time. So from some of these tech companies, we expect growth throughout, I would say, several years. And not only over 1 or 2 quarters. I think, Stefan, what we can add to that is that quite often there are several different use cases within one organization and some of these organizations can be quite large and to some extent, decentralized. When we come in and we establish ourselves as a strong vendor and a trusted partner, it's not unusual that new use cases are added over time, which might increase the scope from what we initially targeted. Thank you. That's very helpful. On the operator division, now you guide for 15 operating margin next year. But over the 3 past quarters, it has averaged margin of roughly 5% What would you say are the main reason for this? And what will need to happen in order for you to reach your guidance? For example, is the guidance fully dependent on you getting larger expansion projects again? Or are you working on the cost side of things? So, I think the main reason is that we have had a slower conversion from sales to orders. And we're building that pipeline, building that pipeline up. And at some point in time, the conversion will increase. I think that's the main reason. And then we had your follow-up question on that. I think, Stephanie, you asked a little question. Yes. So I mean, when we guide around the 15% margin target, that is with a normal rate of capacity expansion projects. We always have a certain rate of capacity expansion projects in the business. Last year, we had a much higher degree of the capacity expansion projects, but, guiding through the 15% we expect a normal degree of capacity expansion projects. I think it's fair to say that this is a bit volatile. And the the sort of margin target that we have is meant to be a view of what we think this business can sustain, sort of on a stable long term basis. It is likely to continue to be a little bit choppy between the quarters also in coming years. Okay. And the final question for now, looking at the 1.4 percentage point gross margin expansion in Enterprise Division, how much of that would you say is driven by the unwire acquisition? I think you can actually you can probably figure that out a little bit from the slide so we can take it offline if you want to run the numbers a little bit on how that plays out. So let's do that offline. We'll now take our next question from Daniel Derberg of Handelsbanken. Please go ahead. Good morning, gentlemen, and very big congratulations to report. Starting perhaps with on RCF, you believe that all use operators will be on board here in 2018 and you expect some international coming up. And can you just remind me of the revenue model that I guess now is finalized and how it will look like towards your current revenue model on the estimate side and also how you expect to what you have seen so far in terms of fallback because you work with Google as the pullback supplier. For example iPhones just for now. Can you comment more on that? Yes. So I think the revenue model to some extent is still unclear. We're seeing the 1st mobile operators now launching, tariffs for RCS, but I think there is still a landscape that is moving. We're seeing transaction based very much similar to how you use SMS day being priced a bit higher than SMS. And then we're seeing more conversational or more reach media content priced at the higher, at the higher tariffs. I think currently, we are still waiting pricing models for conversational RCS, where you sit in, for example, a customer support use case. And that is still the marketplace is still looking to see what kind of use case is that will be and how to price that together with the mobile operators and the enterprises. But the sort of the transactional how you use SMS today and the rich media use case have been priced by 1 or 2 mobile operators to date. Perfect. And that's good. I guess the fallback revenues is not a big visible today and, but I guess it could be interesting in 2019 2020 for this year. Yes. So I think we should not expect any larger revenues that would be visible in our numbers in 2018. That is for 2019 2020. And we expect the same business model as for SMS today, so that we would connect and we would pay the mobile operators to provide this service. Perfect. And then if you can, sorry. What we can add is that in a simple use case where you use RCS similarly as you'd use SMS today. So if you just send a text message, then the choice of technology to the end user isn't that interesting, right? So you could see some migration from SMS to RCS on these sort of traditional use cases, that will just be a function of price probably with fall back to regular SMS when necessary. Where it becomes more incremental is when you add the richer functionality, action buttons, carousels and rich media and so forth. Which will come over time. Yes. Another question, if I may, on the Nova platform, and if you can comment a bit on your view on how would that change your competitiveness versus your peer And also if I may ask about how you aim to refocus, you talk about changing your focus from internal integration to tech development and marketing. If you could comment more on that, how large how many people are we talking about more or less and then what to expect there? Yes. So I think it's And when we talk about this, and I can give you a couple of example, our customer account managers and sales people have been focused on migrating customers for the last couple of quarters, handholding customers to migrate from our old platform to platform. Now they can start spending much more time on growing the customer base. Talking about new services, talking about more use cases rather than migration. We also see in our customer support and other parts of the organization that's been occupied by the migration of customers to the NOLA platform or just free up more time and resources for forward looking activities. It's of course difficult to quantify that. And how much that will mean, but we're also optimizing one major effect that I want to talk a little bit about is optimizing the network. Of view to that. Our operations and support departments being very busy with the customer migrations We have a sort of a ketchup effect now that those resources can be applied for more normal business to integrate more mobile operators on flower network and reduce COGS. But again, it's difficult to quantify what that means more specifically to our numbers. Perfect. Thank you very much and good luck here in the queue for you. There are no further questions We now have a follow-up question from Sasan Aberg of Carnegie. Please go ahead. Yes, thank you. Just to more or less sum it up, but your financial target of delivering an adjusted EBITDA per share growth of 20%. At this point in time, how confident are you to deliver on that target this year? I think it depends a little bit on how you measure. We typically say this this is an annual target. You normally measure this on a rolling 12 month basis. And obviously, then it takes some time to catch up. I think if you make that calculation Q2 this year over Q2 last year, it looks a bit more cheerful. But other than that, I think we'll leave it to you to figure out where those numbers will end up a year from now. All right. Thank you so much. We will now take a follow-up question from Daniel Gerberg of Handelsbanken. Please go ahead. Yes, one more for me as well. I just saw that you commented a little bit on the UK pricing currently being more stable. Can we expect this to continue, if you could comment a little bit more of the trends in pricing and perhaps on the other mix effects you've seen in enterprise in the quarter, etcetera, if you also had a positive effect from geography? Sorry, just can you please repeat the question? Yes. I think you wrote somewhere about the positive trend in the price thing in the UK, if I'm not misread that. And if you also comment a bit on the overall impact of the geographic mix in the quarter with regard to gross margin and the price? Well, as you know, we have made it very clear that our gross margin is is highly dependent on the terminating markets. And prices are different between different terminating markets, Those margins are different, but we also see obviously shorter term price changes in different markets. And as we pointed out, we've seen slightly better conditions in the UK market in the quarter. It's nothing dramatic, but it has contributed to the increase in gross margin. We've also seen traffic from a number of major U. S. Clients with good profitability. That is obviously both an effect of pricing and the terminating markets, but we don't really want to go into more detail than that. In mind. There are no further questions over the audio at this time. Thank you. If there are no further questions, we'll just take the opportunity to thank those who called in. Feel free to reach out and get in touch if you want to discuss our company, our figures and our future prospects, we're here to help. So thanks for today and have a good summer. This concludes today's call. Thank you for your participation. You may now disconnect.