Earnings Call: Q1 2018

May 18, 2018

Good day, and welcome to the CLX Communications AB First Quarter Reports January to March 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Thomas Heath, Chief Strategy Officer and Head of Investor Relations. Please go ahead, sir. Thank you, operator, and warmly welcome everyone to the 1st quarter earnings call with CLX Communications. My name is Thomas Heath. I'm the newly appointed Chief Strategy Officer and Head of Investor Relations. With me in the room is our President and CEO, Johan Heidbai, together with our Chief Financial Officer, Ott Boliden. And with those introductory remarks, I'll leave the floor over to you communications. So some highlights from the, from the quarter, first quarter. We put a lot of in this quarter to restructure our enterprise sales team. And I'm glad that we're delivering 16% organic growth in the quarter. And as part of this initiative, we also hired an APAC regional director to strengthen our APAC sales teams. 2017, we established a lot of relationship with many of the U. S. Global digital native companies, out of the 10 biggest tech companies, we have signed 8 to date. Recently had a successful launch of one of the key customers we signed and positive outlook for further launches in Q2 and Q3. We took major steps toward complete migration of customers onto our new platform Nova. All non U. S. Customers have been migrated today. And we are on time to migrate the remaining It was a slightly disappointing quarter for the operator division. We had a low conversion from pipeline to order and sales. The pipeline though remains strong. And we concluded the acquisitions of unwire and vehicle. On the next slide. So talk a little bit more about the unwire acquisition. The unwire is based out of Denmark and Copenhagen, strengthening our position in the Nordics and especially in the bank and finance sector. Has a positive contribution to our margins? We will integrate Unwire through a phased integration approach to safeguard our organic performance. And this is an acquisition in line with consolidated market and build further scale to CLX. Next slide, please. Talk a little bit more about the vehicle acquisition that we also concluded in Q1. Vehicle is phased out of Seattle in the U. S. And that is to strengthen our position in next generation messaging services like RCS. It's a personalized video messaging platform. With a strong view as customer base, large, large brands. We see a good cross sell potential to CLX Enterprise base, especially in the U. S, but also to mobile operators in the rest of the world. Next slide, please. We continue to invest in our voice and real time video solutions on the back of good demand from especially the ride sharing segment across the globe, We are live in many markets and continue to roll out into more countries Across the Globe We also continue to broaden our customer base from this particular segment. And with that, I'm handing over to Odd Boling, our CFO, to detail more details on the numbers. Thank you, Johan. Good morning, everybody. Let's start just turning through the numbers briefly. Gross profit increased to $200,000,000 from $198,000,000 last first quarter last year, we had an EBITDA of $53,000,000, which was a decrease compared to last year, but adjusted EBITDA was 6 $5,000,000. Our EBIT was $20,000,000 and the net profit was 9,000,000. As Johan pointed out, we are disappointed with the operated division this quarter. We had a slower than expected conversion. Sales to revenue. We had had some increasing OpEx in the enterprise division due to the finalizing of the Nova Development project and the customer migration. But we are in parallel with this redirecting our effort and our focus towards organic growth, where we have seen some initial uptake at this point. Seems just developing it according to plan. Next slide please. Looking a little bit more into the details of enterprise. We had a flat EBITDA versus the same quarter last year and very strong customer pipeline, in particular with some U. S.-based global enterprises. We have had an increase in OpEx during the quarter, as I mentioned, as recently. Primarily due to this, finalization of the Nova platform project and the customer migration that goes through that. We expect OpEx to stay flat to increase a little bit during the second quarter, for the same reasons. We are at the very final stage of the customer remigration, and that demands some extra resources in order to finalize with the right quality and on time. After the second quarter, certain qualified resources from those projects will be redirected first developing new products and services, within cloud platform as a service. The unwire acquisition had no material impact in the first quarter. It was down as you you remember, at the 27th March, that will contribute significantly during the rest of 2018. Slide? The operating division, the underlying business is continuing to develop as planned pretty much, but we have had a slow conversion of sales pipeline to orders and orders to projects and projects to revenue. During the winter this year, which has, which is now causing us to, or creating a slower lower revenue and the profit that we had expected and we are obviously not happy with this development, but we still continue to see a strong sales pipeline And we believe that the long term outlook for the division is unchanged. We've had no capacity expansion projects for a few quarters. We are confident we will see further capacity expansion projects going forward, but we cannot forecast when those will materialize. We continue to invest in sales and marketing, in order to grow our top line long term. And we stick to our 15% EBITDA margin as a forecast for the medium term for the division. Next slide, please. Looking at Cinch, we continue to invest in increased functionality and order customer specific adoptions. Ridesharing is developing very favorably for us and the further markets are set to go live during the remainder of the year, which, will have a positive impact. On the development of the unit. Really quickly is, as you are mentioned, developing well, we see increasing revenue and very considerable interest from the number of large or very large potential customers. We continue to make rather moderate investments in internet of things. That way mirroring the relatively slow pace of market development. We continue to do development work for Reach Communication Services, because we see a strong interest in that area, and we want to be We're going to be part of that and we want to match the rate on the market expansion through our development efforts. Next slide, please. Just to repeat our internal key metrics, we are looking primarily to gross profits and adjusted EBITDA to gross profit, OpEx per transaction is key metrics. We have said this before, but it's what we reiterating, we do not consider gross margin to be a relevant measure since that is to a very high degree dependent on in which market our traffic terminates, which we can only have some influence on. Gross profit transaction and gross profit is a more interesting measure for us. And obviously, OpEx per transaction in order to measure operational efficiency. Next slide, please. Looking at those, we see gross profit continuing to grow. The rolling 12 month figure is growing. We will, we saw quite a bit of an uptake versus the first quarter of 2017. Needs to be emphasized here that that was a weak quarter, and we've had some positive prioritization effects during this quarter. The positive, the long term outlook is, however, in our view, still very positive. And we continue to see an increasing number of transactions, mirroring the organic growth we have in the business. Next slide, please. Now we do see long term, a long term trend towards further operational efficiency due to the economies of scale that we continue to increase. But we had a little bit of a dent in that development this quarter due to the increasing OpEx, we've reported for with another project in the migration project. Now with that, I'll give the word back to you on the logistics going forward. Thank you, Odd. So, our next slide. So we will talk a little bit more about next generation enterprise messaging. And the technology that is named RCS, which communication suite. We believe that RCS has the potential to replace many applications on the phone. All U. S. Carriers have now committed to launch RCS in 2018. We are also starting to see price points in the market for RCS services being launched by mobile operators where we can share and network that we already have with the mobile operators. We hosted an event in Atlanta earlier this year, It was a great event to position CLX as the early market leader as RCS develops going forward. We launched an SMS RCS API that allows customers to fall back on SMS Since there will take some time until RCS reach full market potential, with being compliant with all the mobile phones in the marketplace and all the mobile operators adopted the technology. Next slide, please. So we'll talk a little bit more about multimedia messages and the vehicle acquisition that we recently made. So mobile messaging is the only channel that instantly reaches 5,000,000,000 users, reaches 100 percent of devices, and has a 98% open to show you, but the unfortunately don't work with this conference bridge. But mobile, I will talk about it instead. So this is an example where U. S. Mobile operator sends a 45 second multimedia content. To users that signed up first bill will look, how the first invoice will look to avoid churn from their user base. It also uses an upsell opportunity to sell a insurance on how you protect in churn of new subscribers and also increase in sales from add on products. With very successful implementation of these kinds of services. We're seeing this being now launched across large variety of different enterprises and segments in the marketplace, especially as a welcome service. And with that, we are finished with the presentation for for this you. You. You. And our first question comes from Stefan Abers from Carnegie. Please go ahead. Your line is now open. Hi and good morning. I guess it's fair to say that your organic growth is on the right track now, but what will need to happen for you to deliver similar organic growth for organic gross profit growth as your main listed peers. Is it more a function of different end market exposure or could you could a difference be explained by execution or your current team place? So I think the main factor for our gross margin development is terminated market for SMS messages. So where the U. S. Contributes with the higher gross margin than, for example, Europe. So a large exposure to the U. S. Market increases the gross margin. Okay. But let's let's look at gross profit then instead of the top line. So the same question, the organic growth of your gross profit what will need to happen for you to deliver the same growth as your peers? Can you just please specify what growth levels you're referring to? We can our peers can be defined in different ways, right? Okay. So looking at the gross profit in Enterprise division, it's up by 1,000,000, but on the other hand, you had some acquisition impacting that number. And as you pointed out, it was fairly fairly weak quarter last year in the enterprise. So I mean, it's fair to say that you under form peers when it comes to organic growth. And I'm wondering what your take on that is? It because you have different exposures or is it that you have fail on the execution in some way? We with the increasing focus we have now on organic growth, we'll see stronger growth coming out of that, whether that's going to be in line with, some still undefined peers is obviously not clear, but, we are quite happy with what we're seeing in our pipeline and we think that the way forward will show that we are on the right track. All right. Just for the integration acquisition costs, your operating costs were fairly high in the quarter as you pointed out also. It was up by around 5,000,000 quarter over quarter. But given your cost base now will be impacted by the 2 recent acquisition on one hand and the announced cost savings on the other, what is the reasonable underlying run rate of your OpEx going forward for the group? You mentioned the enterprise level in the presentation, but overall, do you see it trending down now given the acquisition or how should we think about it? Well, as we said, during the second quarter, in the enterprise division, we'll see similar or slightly higher OpEx than we had in the first quarter because we are moving from an intense phase to an even intensive phase when it comes to closing a Nova project in the migration. Beyond that, we will allocate some resource, some qualified resources seem to development in new services and product because we feel that that's a necessary step take in order to be able to fully benefit from all the opportunities we see in the market in the cloud platform as a service market. We don't see any major changes to the operator division. We do, as you know, strengthen our top management team, this year, which obviously have some impact. And what you can expect from the acquisitions is in line with what we've seen so far. We don't see any reason to expect the cost base in either of the acquisitions we have made so far to go through any major changes this year. All right. And then final question for me. You have a financial targets, of course, of delivering an adjusted EBITDA per share growth of 20%. Looking at the performance in Q1, how confident are you that you will be able to reach that for 2018? Well, considering that the financial target includes both organic and acquired growth and that we have now on wire and vehicle on board. We feel the, the, we have good, good opportunities share our targets. And there seems to be no further questions over the telephone at this time. So I would like to hand the call back to our speakers. Thank you very much for listening into the Select Communications Q1 earnings call. And for any of you listening in who Fine. You have follow-up questions further during the day. Just reach out and we'll answer your questions to the best of our ability. That ends the call. Thank you very much for participating. And that will conclude today's CLX Communications AB First Quarter Reports, January to March 2018 Conference Call. Thank you for your participation.