Please go ahead.
Ladies and gentlemen, warmly welcome to CLX Communications Q2 2018 conference call. On the call today, we have Johan Hedberg, our President and CEO, Odd Bolin, our Chief Financial Officer, and myself, Thomas Heath, Head of Strategy and Investor Relations. With that introduction, I'll hand over to Johan.
Thank you, Thomas. Good morning, welcome to CLX Q2 earnings call. 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 5 billion users instantly across the globe. We are investing in Communication Platform as a Service, adding new services to our offering, like voice and video. 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 an operator division, supplying software to mobile operators in the group. Today, using our services, enterprises send 25 billion 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, it's fascinating to see how enterprises use our cloud-based APIs to drive efficiencies or new sales. Jumping into the 2018 Q2 highlights. We grow organically, revenues 18% in local currencies. Gross profit up 30%, both due to organic growth and successful M&A. Adjusted EBITDA up 32%. See a strong performance in the enterprise division. Slight improvement in the operator division versus last quarter on EBITDA. On Sinch, 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 start to see some revenue synergies already now from that acquisition. Diving into the enterprise division.
Continued growth in messaging traffic, both from new and existing customers. mBlox 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. 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 eight. We now have live traffic from five of them, up from four 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 Unwire. 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 2018 and work ongoing to reach our target of 15% EBITDA margin as earlier communicated. Some comments on Sinch and Vehicle. Sinch is continuing to invest in broadening their product portfolio 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. We expect to see a breakthrough in revenues in H2 from the ride-hailing segment, where we currently are seeing an increased activity level. 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 million that we paid Norauto. We paid another $4 million as an earn-out now in July, due to the positive performance the company has showed during this period. We have also another upcoming potential earn-out of a total of $18 million over the next years if growth targets are met. We have seen a very positive development recently that has made us more positive about the potential for the company actually meeting these very aggressive growth targets. We hope to see that they will be met in such a way that we will be forced to actually pay out this money. Let's talk a little bit about the quarter as such.
As Johan mentioned, gross profit increased considerably. That was due to both acquisitions and organic growth. Organically, we've seen slightly better prices in some markets. We've seen good profitability in some large use-based companies' traffic. That has contributed to the considerable organic growth. It was a record quarter for us. Adjusted EBITDA of SEK 97 million was higher than we've ever seen before. We're quite happy with that. EBITDA was SEK 80 million, with an EBIT of SEK 40 million. The difference between the EBIT and the EBITDA is almost entirely due to the fact that we are doing depreciation of customer and supplier relationships from former acquisitions. Those are obviously not impacting cash flow. Net profit for the quarter was SEK 29 million, 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 have some tax loss carryforwards in the U.K. that we are not utilizing at the moment. Those are from the Dialogue acquisition. They are not very large. We are in the process of confirming whether we can use them or not. Temporarily, it gives us a slightly higher tax rate. The operator division is improving, although the conversion of pipeline revenue is still impacting the slower conversion that we've seen during the winter and in the spring and still impacting the figures. Sinch and Vehicle are developing as planned. Vehicle is, as I mentioned, developing very well. We're very happy and satisfied with that acquisition. 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, you can see that acquisition has increased our gross profit by 13%, while organic growth has contributed 11%. We have very strong momentum in Unwire, where we've seen a considerable gross profit contribution. Once again, some large new clients are driving organic growth. We've seen good gross margin development in those clients for the quarter. Looking at the EBITDA bridge, the organic growth is 28%. Most of that obviously coming from the enterprise division, with a little bit of effect from operators. Close to zero. We do see improvement going forward. If we look at it on a year-over-year basis, acquisitions have contributed the lion's share of the growth, 18%, while the organic part has been 12%.
On the EBITDA level, organic growth has been 6%, due to the increasing OpEx that is an effect of the phase 1 of the Nova project. Just a few words about key metrics that we're using. In the enterprise division, gross profit is the most important metric for us. As we have explained several times, gross margin is very much dependent on the traffic mix that we see, which is out of our control. Absolute gross profit is our key metric. Adjusted EBITDA to gross profit measures operational efficiency. We see a continuing good trend there. OpEx per transaction is also important. We need and we want to have lower cost per transaction than our competitors through efficient processes and systems and large scale. Operator division, we measure revenue and EBITDA. In the new investments, such as Sinch and Vehicle, we measure gross profit growth.
Looking at those figures with more operational efficiency, we do see a continuing good trend in EBITDA to gross profit, and also OpEx per 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. With that, I give the word back to you, Johan.
Thank you. Thank you, Odd. Q2 was a strong and successful quarter for CLX. We see good potential for future growth, mainly driven by a strong pipeline with some of the largest digital native tech companies in the world. Today we have five out of eight live. We target to have two additional live in 2018. We also have a very strong pipeline overall in North America, not only from big tech. Sinch, for the ride-hailing segment, we expect to see larger revenues from this in H2 in 2018. We're seeing good interest and increasing interest from the personalized messaging video experience that Vehicle provide. We are using now our mobile operator relationships and also cross-selling that 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 those 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. Now we have most of our customers on one platform. It's been a long project for us, but that is now finalized. Now having almost all customers on one platform means we'll get more efficient. I'm confident that this will result in a positive development on gross profit, both through higher sales, but also through some reductions in COGS as we optimize our network. Good. Some more words on the personalized messaging video experience from Vehicle, 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 welcome message, but also to educate them about the service and invoicing processes. 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 a conversational experience. Can, to some extent, replace applications, apps on smartphones. We expect rollout to have all mobile operators on board in late 2018 in the U.S., then gradually roll out over the next two to three years across the globe.
There are still some hurdles to overcome. We're expecting Apple to make an announcement on RCS, hopefully in 2018. This could be a major revenue contributor for CLX over the coming next years. All right. With that, we will finalize the presentation, and I'll hand over to Thomas for Q&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. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a headset, please pick up your handset before pressing star one to allow your signal to reach our equipment. Once again, if you would like to ask a question, please signal by pressing star one. We'll now take our first question from Staffan Åberg of Carnegie. Please go ahead.
Hi, and good morning. You talk about the new major U.S.-based tech company that has begun to use your platform, which you state contributes to the strong organic growth in the quarter. 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 one or two 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. We see continuous ramp-up over several quarters, so it is not only one to two quarters in general. I think it is about establishing trust and grow that trust over a period of time. From some of these tech companies, we expect growth throughout, I would say, several years, and not only over one or two quarters.
I think, Staffan, 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 is not unusual that new use cases are added over time, which might increase the scope from what we initially targeted.
Thank you. That is very helpful. On the operator division, now you guide for 15% operating margin next year. Over the three 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?
I think the main reason is that we have had a slower conversion from sales to orders. We are building that pipeline up, and at some point in time, the conversion will increase. I think that is the main reason. We had your follow-up question on that.
I think, Staffan, you asked.
Oh, expansion projects we had as well. Yeah.
Yeah.
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. 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 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. The final question for now, looking at the 1.4 percentage point gross margin expansion in the enterprise division, how much of that would you say is driven by the Unwire acquisition?
I think you can probably figure that out a little bit from the slide, we can take it offline if you want to run the numbers a little bit on how that plays out. Let's do that offline.
Right. Thank you.
We'll now take our next question from Daniel Djurberg of Handelsbanken. Please go ahead.
Yes, good morning, gentlemen, very big congratulations to your report. Starting perhaps with technology and RCS, you believe that all U.S. operators will be on board here in 2018, you expect something from that to coming up. Can you just remind me of the revenue model that I guess now is finalized and how it will look like versus your current revenue model on the SMS side? Also how you expect what you have seen so far in terms of fallback, because you work with Google as the fallback supplier, for example, iPhones as from now. If you can comment more on that, would be great. Thanks.
I think the revenue model to some extent is still unclear. We're seeing the first 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 today, being priced a bit higher than SMS. Then we're seeing more conversational, or more rich media content priced at a higher tariff. I think currently we are still awaiting pricing models for Conversational RCS, where you use it in, for example, a customer support use case. The marketplace is still looking to see what kind of use cases that will be and how to price that together with the mobile operators and the enterprises. The transactional, how you use SMS today and the rich media use case have been priced by one or two mobile operators to date.
Perfect. That's good. I guess the fallback revenues is not as big, visible today, but I guess it could be interesting in 2019 and 2020 for this year.
Yes. I think we should not expect any large revenues that would be visible in our numbers in 2018. That is for 2019 and 2020. We expect the same business model as for SMS today, so that we would connect and we would pay the mobile operators to provide their service.
Perfect. Sorry.
Well, no, 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. You could see some migration from SMS to RCS on these traditional use cases. That will just be a function of price, probably, with fallback 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.
Yeah. Another question, if I may, on the Nova platform, and if you can comment a bit on your view on how that has changed your competitiveness versus your peers 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 can comment more on that, how many people are we talking about, more or less, and what to expect there?
Yes. When we talk about this, and I can give you a couple of examples, our customer account managers and salespeople have been focused on migrating customers for the last couple of quarters, handholding customers to migrate from our old platform to the Nova 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 in other parts of the organization that's been occupied by the migration of customers to the Nova platform, we 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.
Due to that, our operations and support departments being very busy with the customer migrations, we have a sort of a catch-up effect now that those resources can be applied for more normal business to integrate more mobile operators onto our network and reduce costs. Again, it is difficult to quantify what that means more specifically to our numbers.
Perfect. Thank you very much, good luck here in Q3 and have a great summer.
Thank you.
There are no further questions over the audio at this time. Once again, if you would like to ask a question, please signal by pressing *1. We now have a follow-up question from Staffan Åberg of Carnegie. Please go ahead.
Yes, thank you. Just to more or less sum it up, 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 is an annual target. You'd 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. 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 Djurberg of Handelsbanken. Please go ahead.
Yeah, one more from me as well. I just saw that you commented a little bit on the U.K. pricing trends 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 mixed effects you've seen in enterprise in the quarter, et cetera. If you also had a positive effect from your growth.
Sorry, can you please repeat the question?
Yeah. I think you wrote somewhere about a positive trend in the pricing in the U.K. If I'm not misread that, and if you also could comment a bit on the overall impact of the geography mix in the quarter with regard to gross margin and enterprise.
Well, as you know, we have made it very clear that our gross margin is highly dependent on the terminating markets.
Yeah.
Prices are different between different terminating markets. Gross margins are different. We also see, obviously, shorter-term price changes in different markets. As you pointed out, we've seen slightly better conditions in the U.K. market with 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. We don't really want to go into more detail than that, if you don't mind.
That's fair enough. Thank you.
Once again, if you would like to ask a question, please signal by pressing star one. There are no further questions over the audio at this time.
Thank you. If there are no further question, 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. Thanks for today, and have a good summer.
This concludes today's call. Thank you for your participation. You may now disconnect.