Good day and welcome to the CLX Communications AB end of year report, January to December 2017. Today's conference is being recorded. At this time, I would like to turn the conference over to Johan Hedberg. Please go ahead.
Thank you. This is Johan Hedberg, and good morning and welcome to CLX year-end report for 2017. In the room it's myself and Odd Bolin, CFO. Take next slide. The 2017 key metrics for growth. 2017 was a great year for CLX, with growth in both gross profit and EBITDA, over 60% from last year. We delivered more than 18 billion billable transactions in 2017. To put this in perspective, given that there are 5 billion mobile users on the globe, we delivered almost four transactions to every mobile phone in the world during 2017. That's the scale we've reached today. Next slide. Over the last 18 months, we focused on building scale and technical platform to support future organic and acquisitive growth. 2017, we also established many relationships with digital native U.S.-based companies. We look forward to harvest the results in 2018.
Out of the 10 biggest tech companies, we now have signed seven. Some of them are still in the implementation phase, and others have not reached their full potential. Our goal in 2018 is to establish CLX as one of the top vendors globally in the Communications Platform as a Service place. We took major steps to finalize our next generation platform, Nova. This project will be finalized during the first half of 2018. We also continued to invest in our product portfolio. Sinch revenues grow by more than 60% in 2017, and the company has a strong pipeline entering 2018. 2017 was a solid year for the Operator Division with good earnings. As the service market for mobile operators and service providers continues to grow, we are well-positioned for future growth in that area. Next slide. The key metrics for the group.
In the Enterprise Division, we focus on gross profit. We measure gross margin is less important, since the main driver for gross margin is geographical traffic mix, in what country we terminate transactions. U.S., for example, has high gross margins, and France, low. We don't want to be restricted depending on the termination market and the gross margin for that. We also use adjusted EBITDA and gross profit and OpEx per transaction to measure operational efficiency in the business. For the Operator Division, we measure revenue and EBITDA, and for Sinch and other new investments, it's gross profit growth. Next slide, please. This illustrates the gross profit and number of transactions in our systems over time. This also illustrates the rapid growth that CLX had for the last 18 months.
For the last two quarters, we had to digest some of the rapid growth we saw in late 2016 and early 2017. We're now ready to be more aggressive in the marketplace again. Next slide, please. I'll hand over this to Odd Bolin.
Thank you. The operational efficiency has increased, continued to increase due to economies of scale. The gross profit is the primary bottom-line driver. Revenue and gross margin are both heavily dependent, as Johan pointed out, upon the mix of terminating markets. The key metrics for us is to measure EBITDA divided by gross profit. As you can see in this figure, we have seen a steady improvement in that number since mid-2016. We believe that although there might be some further potential, we have come a long way in terms of operational efficiency. We are, at this point, quite satisfied with the developments we've seen and the situation we have reached. Johan.
Next slide. Some comments on the Q4 for the Enterprise Division. EBITDA is up 26% to SEK 79.1 million compared to Q3 2017. Remaining cost synergies from acquisitions are SEK 20 million to SEK 25 million in 2018. We are pleased to see that organic growth, gross profit has grown with 10% compared to the last quarter. Anders Sahlin started on January 15 this year as COO for the Enterprise Division. Anders will focus on creating an agile commercial organization, focusing on organic growth, winning new customers, and expand business with our flagship accounts. Black Friday and the holiday seasons generated high traffic volumes for us. The high pass-through fees in France, combined with new pass-through fees in the U.S., resulted in a 1.7 percentage points lower gross margin compared to Q3 2017. Next slide, please.
What is here is an earnings bridge for the Enterprise Division, where we have tried to show how EBITDA has developed due to different factors from the fourth quarter 2015, via the fourth quarter 2016, to the fourth quarter last year. As you can see, we have divided the development of the EBITDA into acquired EBITDA, which in 2016 came from Mblox, and in 2017 from Xura and Dialogue, organic growth, and also effects of one-off character. These effects amount to about SEK 19 million in the fourth quarter of 2017, and they consist of a few isolated effects.
The major ones being a major customer becoming a competitor and thus decreasing the traffic with us considerably, and also regulatory changes in the U.K. that increased cost of goods sold for us in both the U.K. and in other markets in such a way that we couldn't pass on this entire effect to our customers. The full effect of these issues or these items became visible from Q3, although some of them started already in Q2, as communicated previously. What I would like to point out is that even considering those effects of a one-off character, we have increased our quarterly EBITDA by more than SEK 15 million over the last 24 months. Johan?
Next slide. We hosted an RCS event in Atlanta together with the GSMA. Google and all of the U.S. mobile operators, and operators from around the globe participated. In total, more than 150 people. It was a great event for CLX to position itself as the market leader for RCS. We also launched a hybrid SMS RCS API. This will allow customers to send RCS messages with a fallback to SMS if the mobile phone is not yet RCS compatible. RCS can replace a lot of applications with its rich feature set. We believe RCS will make the messaging market grow a lot over the coming years. They are still in an early phase, where the standardization is not fully completed. We think that all of the mobile operators in the U.S. will have RCS live by the end of 2018.
This is a market that is developing rapidly. We are well positioned to go after this market, and we're very excited about it. Some comments on the Operator Division in Q4. The underlying business is developing well. In this quarter, we did not have any capacity expansion projects. Capacity expansion projects are difficult to predict quarter by quarter. We also had some costs for third-party licenses that impacted this quarter. We will increase investments in sales and marketing as we see the as-a-service market for mobile operators and service providers grow in the coming years, and we're well positioned to go after that marketplace. We think that 15% EBITDA margin is a good medium-term number to use for this division. Next slide. Some comments on Q4 for Sinch and IoT.
We continue to invest to increase our functionality and to invest in customer adaptation to win large customers. Ridesharing in particular is developing favorably. We continue to invest in IoT, but at a moderate level, mirroring the relatively slow pace of market maturation. We expect to see some ridesharing breakthrough large revenues, important revenues, in 2018. Next slide. Just want to repeat our growth strategy. Organic growth, upselling our installed customer base with new services, continue to expand our geographical footprint. In 2018, we will have a much more focused strategy for Asia-Pacific and China. Expand our product offerings, and also continue to do selective acquisitions. Odd Bolin?
Thank you. We're at slide October to December 2017. I'll not go through the figures as such in any detail in general, because they're all in the report, and you can follow them there. There are a few items that I would like to elaborate on, those are items affecting comparability and some tax and amortization issues. If we move to the slide that is called items affecting comparability, et cetera. First of all, in the fourth quarter 2017, the items affecting comparability includes a revenue of close to SEK 12 million due to write-down of an earn-out for Xura that didn't materialize. This gives us some revenue, which makes the adjusted EBITDA higher than the reported EBITDA. There's nothing strange about this. It's an item that affects comparability, and it has nothing to do with the underlying business.
I understand it might look a little bit strange. There it's being offset by a change in goodwill, that is affecting the income statement below EBITDA. If you look at the net profit, there is no impact. Also in 2017, the EBIT was affected by SEK 126 million of amortization of customer and operator relationships. Those came with the acquisitions of Mblox, Xura, Dialogue, and Sinch, and it's the level we expect them to stay at for the next few years. 2017 tax was affected positively. Also, 2017 fourth quarter tax was affected positively by SEK 87 million, giving us a positive tax rate. Those were for two reasons. The change in the U.S. corporate tax, that is an effect of the recent decision in the U.S. to implement a tax package, affects the value of our U.S. deferred tax assets and liabilities.
Also an analysis of deferred tax assets in the U.K. has concluded that those can be capitalized to a larger extent than we originally believed after the acquisition of Mblox. Both of these have been booked as deferred tax in the income statement, affecting the tax rate. The actual taxes paid can be seen specifically in the income statement. Those deferred tax changes has no effect on the cash flow in the period. Obviously by using these deferred tax assets in the future, we will be able to get a better cash flow. From our point of view, it's a very positive development. Johan?
Summarizing this call with our priorities going forward for 2018, we're going to focus on increase our visibility in the CPaaS marketplace. In North America, harvest the results from the hard work in 2017 with the digital native companies, big tech companies, and continue to grow that market unit. We have a new COO on board, create a more agile sales team focusing on organic growth. We are splitting out Asia Pacific as a separate market unit, also including focus on China. Continuing investment in sales and marketing in the Operator Division to fuel top-line growth and ride on the trend that mobile operators and service provider use more as a service. 2018 will see the first large deals in our new service offerings, and also see the first small revenues from RCS. 2018 will be a very exciting year for CLX.
With that, we're turning over to Q&A.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. Please ensure that the mute function is switched off to allow your signal to reach our equipment. If you find that the question has already been answered, you can remove yourself from the queue by pressing star two. Again, as a reminder, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. We will take our first question from Fredrik Lissell from Danske Bank. Please go ahead.
Thank you very much. Good morning. Thanks for taking my question. Can you talk a little bit about, you came back in terms of organic growth in the quarter to an 8% level. Your competitors, both in the Nordics and in the U.S., are trailing at slightly higher levels. Do you feel that you are on your way up, or is 8% on a global type of market more the levels you see in terms of organic growth going forward? Thank you.
I think our ambitions are higher from where we are today. We definitely want to have a more aggressive organic growth rate. We are right now creating a more agile sales team structure. It might take some time to get that fully operational and implemented, but that's definitely our ambition.
Okay, thank you. Just another one, then I will go back to the line. You talk about additional cost savings, SEK 20 million-SEK 25 million. Could you elaborate on, you've talked earlier about that you will get some cost savings out from Dialogue once you have the Nova platform in place, and you can release some employees and all that stuff. Is this on top of that, or can you put that in place with other things you have talked about earlier? Thank you.
Sure. Morning, Fredrik.
Thank you. Morning.
The SEK 20 million-SEK 25 million is what we have already communicated. It's primarily due to the fact that we were going to close down the Sheffield office mid-year, end of June, and as you said, release some employees. There's nothing new in that. We still haven't done it, because it will be done once all the migration to Nova is done, and we can actually close down the remaining parts of the Dialogue organization that is not going to be needed going forward.
Once you have done that's really on an OpEx level. When you have the Nova platform really up and running, and you can start to move over specific contracts onto that platform, and eventually over maybe a two-year horizon, you would be able to close down other platforms. Is that going to give you other streams of savings on a COGS level, or how should we view that? Thank you.
We haven't communicated anything apart from the fact that we do expect some effects. The closure of the other systems will happen this year, mostly once we have finalized the migration. On a COGS level, we do expect and do hope to see some effects. We haven't, at this point, communicated any figures for that. The SEK 20 million-SEK 25 million is the OpEx savings that we expect, primarily from closing down the Sheffield office, but also to a smaller extent, some remaining effects from Xura.
Thank you. I'll let others have some questions, and I'll come back. Thank you.
We will now take our next question from Stefan Åberg from Carnegie. Please go ahead.
Hello, and good morning. First of all, on the Operator Division, you state that Q4 earnings was burdened by certain investments that you hope will deliver some return ahead. What type of investments are you talking about here, and for how long will this burden the cost base in that division? Also, you state that you will focus on growth there, the base assumption here would like to be that revenues should come down in 2018 from 2017 in that division. What is the current run rate? Is it the level you reported in Q4?
Morning, Stefan. Regarding the cost that we've taken in the fourth quarter, those are one-off effects for licenses and services that we hope will have a positive impact on our operations going forward. Not traditional investments, costs that we still hope will have an impact going forward. Regarding the revenue level that we expect to see going forward, as we have communicated, we have no major capacity expansion projects in the pipeline at this point, the way we had beginning of last year when we won a couple of such projects that we communicated in 2016. We do expect some capacity expansion projects to materialize, we cannot foresee or forecast any major projects of the type we had last year.
We do have a slightly lower starting point, we still expect with the changes that are being done in the Operator Division, with increased focus on sales and marketing, to see a good development during the year. We haven't said anything about the actual level, though, and we're not prepared to do that at this point.
Could you quantify the one-off cost you took in the Operator Division in Q4?
With a handful of millions of SEK.
All right. Also, if I may, on RCS, you mentioned the potential with that, but at which point in time do you hope to see a meaningful contribution from RCS?
I think we'll see the first revenues this year. It depends a little bit on how fast mobile operators are implementing this. We know now that all of the mobile operators in the U.S. will have full support for RCS in 2018. I would say that meaningful revenues could come in 2019.
How long your expectations on your clients' time to adapt? Because if the systems and the functionality is there in the U.S. by the end of this year, how long will it take for your clients to adapt?
I think Sprint already launched with the first couple of trial customers. This is getting sort of a buzz in the marketplace. Of course, not all of the mobile operators are supported today, but brands are starting to think about this. The ecosystem is starting to gear up for this and starting to have conversation with their customers about this. Exactly how fast the uptake will be is difficult to answer, but in North America, this is happening now.
Okay, thank you. I'll go back to the line.
Ladies and gentlemen, as a reminder, please press star one to ask a question. Our next question comes from Daniel Djurberg from Handelsbanken. Please go ahead.
Thank you very much, and good morning, gentlemen. Starting with a question on the big OEM contract, with a contract with a big handset OEM that you won last autumn. I was wondering, did this mean material growth, i.e., was it a big chunk of the 9% organic growth you had in the enterprise segment? Or is it starting to ramp more or less incremental instead? That is the first question. Also, if I could ask a little bit about the pricing model on the RCS, if you are more clear how you will go to market and price it so now. Thanks.
Well, to start with the handset manufacturer that you are referring to the contract. We have seen no revenue in 2017. We expect that to start ramping up now, beginning with 2018, as we have finalized the necessary development work in order to do the couplings needed for that particular customer.
Okay, how to think it will be coming chunk-wise, geography by geography, or will it be incremental, of course, they use others as well. How to think about the impact?
I think we should expect a ramp-up during 2018.
Incremental ramp-up, yes.
Yeah.
Okay, perfect. I know that you look more on the growth on gross profit that was good in the quarter rather than the gross margin trend, perhaps because you can't control everything, regulatory things, et cetera. Again, looking at the gross margin, as we see in your existing markets, everything else equal, how to think on the underlying trend from what you see from competition and so on, it is starting to stabilize here in 2018, or how to think?
If you look at the gross margin by terminating market, we don't see any major fluctuations. The reason our gross margin fluctuates and the reason we don't use it as a key metric for our internal operations is the fact that the traffic mix between those different terminating market is something we have limited control over. Our major customers may decide to send more to a specific market than to another during a month, and that will impact our gross margin. We don't see any major changes to the gross margin by market.
Yeah, fair enough.
It's entirely a mix.
My final question would be on your ambition. Do you still look for to get the share or chunk of the IoT that might rise as an integrator or on the enterprise side for IoT as well, on aggregate?
We're continuing to invest in IoT and then in the segment of the market that is connectivity to mobile operators. We're seeing the market uptake being a little bit slower than we predicted. We will continue to invest at moderate levels in our IoT business.
Okay, thanks.
We have no further questions at this time. If you would like to ask a question, please press star one.
Okay. All right. Thank you for listening in to our 2017 year-end report, and I wish you all a very good day.
Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.