Earnings Call: Q4 2017

Feb 16, 2018

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 Joanne Hedberg, and good morning, and welcome to CLX year end report for 2017. In the room, it's myself and Oll Bowling, CFO. Next slide. So 2017 key metrics for growth. 2017 was a great year for CLX. With growth in both gross profit actions in 2017. To put this in perspective, given that there are 5,000,000,000 mobile users on the globe we delivered almost 4 transactions to every mobile phone in the world during 2017. And that's the scale that we 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 manner relationship 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 7. Some of them are still in the implementation phase and others have not reached their full potential. Our goal in 2018 is to establish CX 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 twenty eighteen. We also continued to invest in our product portfolio, since 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. And as the 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? So 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 would terminate transactions. U. S, for example, has high gross margins and France low. We don't want to have been 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 Cinch and other new investments is gross profit growth. Next slide, please. This illustrates the gross profit and number of transactions in our systems over time. And 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 early 2017. But we are now ready to be more aggressive And we'll hand over this to Odd Building. Thank you. The operational efficiency has increased, continue to increase due to economists' scale. The gross profit is the primary bottom line driver. Revenue and gross margin are both heavily dependent as Johan pointed out, up in the mix of terminating markets. So a key metrics for us is to measure EBITDA divided by gross profit. And as you can see in this figure, we have seen a steady improvement in that number since mid-twenty 16. And we believe that although there might be some further potential, we have come a long way in terms of operational efficiency. We are we are at this point, quite satisfied with the developments we've seen and the situation we have reached. So some comments on the Q4, for the Enterprise Division, EBITDA is up 26% to 79,100,000 CIC compared to Q3 2017. Remaining cost synergies from acquisitions or SEK 25,000,000 to SEK 25,000,000 in 2018. We are pleased to see that organic growth, gross profit has grown with 10% compared to the last quarter. Andrew Salin started on January 15, this year as COO for the Enterprise Division. And this will focus on creating an agile commercial organization, focusing on organic growth, winning new customers and expand business with our flagship account. Black Friday and the holiday seasons generated high traffic volumes for us. However, the, the high pass through fees in France combined with a 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. We are the fourth quarter 2016 to the fourth quarter of last year. As you can see, we have divided the development of the EBITDA into acquired EBITDA, which in 2016 came from Amdocs and, in 2017 from serial dialogue, organic growth and also, effects of on off character. These effects, amounts to about 19,000,000 in fourth quarter of 2017. And they consist of a few isolated effects, the major one, the major ones being immediate customer becoming a competitor and thus decreasing the traffic with us considerably and also regulatory changes in the UK that increased cost of goods sold for us in both the UK and in other markets. Such a way that we couldn't, we couldn't pass on this entire effect to our customers. The full effect of those, issues or these items became visible from Q3, although someone who started already in Q2 as communicated previously. What I would like to point out is that even considering those, effects of one off or one off character, we have increased our quarterly EBITDA by more than 15,000,000 over the last 24 months. So we hosted an RCF 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. There 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. So this is a market that is developing rapidly. We are well positioned to go after this market, and we're very excited about Some comments on the operated division in Q4? The underlying business is developing well. In this quarter, we did not have any capacity expansion project. Capacity expansion projects are difficult to predict quarter by quarter. We also had some costs for 3rd party licenses that impacted this quarter. We will increase investments in sales and marketing we see the asset 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? And some comments on Q4 for Centene and IoT. We continue to invest to increase our functionality and to, investing customer adaptation, to win launch customers. Ride sharing, in particular, is developing favorable. We continue to invest in IoT. But at a moderate level, mirroring relatively slow pace on market maturation. We expect to see some ride sharing 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 foot print 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. June. So we're at the slide, October to December 2017. I'll not go through the figures as such in any any detail in general because they're all in the report and you can follow them there, but there are a few items that I would like to elaborate on and that's Those are items affecting comparability, and some tax and amortization issues. So if you move to the slide that is called items affecting comparability, etcetera? First of all, in the 4th quarter 2017, the items affecting comparability includes a revenue of close to 12,000,000 Swedish kronos, due to write down of an earnout for sewer that didn't materialize. This gives us some revenue, which makes the adjusted EBITDA higher than the reported EBITDA. And, it's nothing strange about this. It's an item that doesn't, that affects comparability. And, it has nothing to do with the underlying business. But 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. So if you look at the net profit, there is no, impact. Also in 2017, the EBIT was affected by SEK 126,000,000 of amortization of customer and operator relationships. Those came with the acquisitions of, Embrok Suraj and Cinch. And it's the level we expect them to stay at for, for the next few years. 2017 tax was affected positively also 2017 4th quarter tax was basically positively by $87,000,000, giving us a positive tax rate. And those are for two reasons. The change in the U. S. Corporate tax that is an effect of the, of the recent decision in the U. S. To implement a tax package. Affects the value of our US deferred tax assets, and liabilities. And also an analysis of deferred tax assets in the UK has concluded that those can be capitalized to a larger extent than we originally believed after the of envelopes. But 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. And those deferred tax changes has no effect on the cash flow in the period. But obviously, we will buy using this deferred tax assets in the future, we will be able to get a better cash flow. So it's from our point of view is a very positive development. So summarizing, this call with our priorities going forward for 2018, I'm 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 Revenue CEO on board, create a more Advised 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 provide to use more asset service? 2018, we'll see the first large deals in our new service offerings and also see the first small revenues from RCF. So 2018 will be a very exciting year for CLX. And with that, we're turning over to Q and you. We will pause for just a moment We will take our from Frederick Clifel from Danske Bank. Please go ahead. 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 the 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. But I 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. And just another one, and then I will go back to the line. You talk about additional cost savings, 20,000,000 dollars, $25,000,000. Could you sort of 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 sort of put that in place with other things you have talked about earlier. Thank you. The 20,000,000 dollars, $25,000,000 is what we've already communicated. It's primarily, due to the fact that we were going to close down the Sheffield office mid or midyear end of June. And as you said, release some employees So, there's nothing new in that. We still haven't done it because it will be done once all the migration can always done and we can kind of close down the remaining parts of the dialogue organization that is not going to be needed going forward. But once you have done that, that's really on an OpEx level. When you have the Nova platform reel up and running and you can start to move over specific contracts onto that platform. And eventually, over maybe a 2 year horizon, you would be able 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. Well, we haven't communicated anything, apart from the fact that we do expect some effects, but, the, closure of the other systems will happen this year, mostly once we have finalized the migration But on the COGS level, we do expect and do hope to see some effects, but, we haven't, at this point communicated any any figures for that. So the $20,000,000 to $25,000,000 is the OpEx savings that we expect primarily from dosing down the shipping dockies, but also to a smaller extent, some remaining effects from Sura. Okay, thank you. I'll let others have some questions and I'll come back. Thank you. Question from Stephan Albert from Carnegie. Please go ahead. First of all, on the operator division, you stated 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 vision. Also, you state that you will focus on growth there, but the base assumption here would like to be that revenues should come down in 2018 from 2017. That's but what this current run rate? Is it the level you reported in Q4? Good morning, Safran. Regarding the costs that we have taken in the fourth quarter, those are one off effects for for licenses and, and services that, we, we hope will have, a positive impact on our operations going forward, not traditional investments, but cost that we still hope will have an impact going forward. Regarding the level, revenue level that we expect to see going forward. We, 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 our capital such projects that we communicated, in 2016, we do expect some capacity expansion projects to materialize that we cannot foresee or forecast any any major projects of the type we had last year. So, we do have a slightly lower starting point, but we still expect with the changes that are being done in the operator division with the increased focus on sales and marketing, to see a, a good development during the year. We haven't said anything about the actual level, though, and we not prepared to do that at this point. But could you quantify the one off costs you took in the operator division in Q4? Alright. And 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. When it 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. So I would say that meaningful revenues could come in 2019. And how long your expectations on your clients time to adapt? Because it's the systems and the functionalities there in the U. S. By the end of this year, how long will it take for your clients to adapt? I think your sprint already launched with the 1st couple of trial customers. So this is getting sort of a bus 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 your customers about this. Exactly how fast the uptick will be is difficult to answer. But in North America, this is happening now. Okay, thank you. I'll go back to the line. Our next question comes from Daniel Duberg from Handelsbanken. Please go ahead. Thank you very much, and good morning, gentlemen. Starting with a question on the big OEM contract, whether contract with a big handset OEM that you won last autumn. I was wondering, did this mean, materially, bring materially 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. And also if I could ask a little bit about the pricing model on the RCS, if you are more clear, have you go to market and price it as of now? Thanks. With the handset manufacturer that you're 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, necessary development work in order to do the couplings needed for that particular customer? Okay. And how to think it will be coming, Shankwais, geography, but geography will be like incremental of the use others as well or how to think about the impact? I think we should expect a ramp up during 2018. Incremental ramp up, yes. Okay, perfect. And then I know that you look more on the growth on gross profit good in the quarter rather than the gross margin trend perhaps because you can't control everything, regulatory things, etcetera. But again, looking at the gross margin as we see in your existing markets, everything helps equal, how to think on the underlying trend from a, what do you see from competition and so on, starting to stabilize during 'nineteen? How to think? If you look at the gross margin, by terminating market. We don't see any major fluctuations. But the reason our gross margin rates and the reason we don't use it as a key metric for internal operations is the fact that the traffic mix between those different terminating market is something we have limited control of. 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. But we don't see any major change the gross margin by market. And my final question would be on your ambition. Do you still look for forty to get the share or shanko, the IoT that might arise as an integrator or on the enterprise side for IoT as well, the aggregator? So we're continuing to invest in IoT and then in the segment of the market that is connectivity to mobile operators But we're seeing the market uptake being a little bit slower than we predicted. But we will continue to invest at moderate levels in our IoT business. Okay. Thanks. Okay, all right. So thank you for listening into 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