Thank you, good morning, and welcome to Sinch Q3 report. In the room, it's me, Johan Hedberg, and also Odd Bolin, CFO. We'll start with slide one in the deck, talk about and repeating Sinch strategy. We have, during the last two years, added a lot of transactions on our network. This is a game of scale, and we're continuing to execute on that. We continue to develop new service offering in the marketplace. This is how communications will be bought in the future, and having a complete product portfolio in this area will increase our presence and sales with enterprises. We also expand our geographic footprint, adding more geographies to our network and also to our customer base, and continue to focus on acquisition. The investments that we are making in our platform will significantly decrease the time to integrate businesses in the future. Next slide, please.
The value chain and how we look at it. We have our core communication services supported by our tier 1 super network. The core communication services today are messaging, voice, video, and mobile data. We have started to slowly move up the value chain to add further market potential, but also to work against some of that price pressure we have seen in Europe. Next slide. Talking about RCS and next generation messaging, RCS is Rich Communication Services. We see this as a great growth potential for Sinch. This is a standard driven by the GSMA, Google and Samsung is very active in driving this into the marketplace. This will be a new experience for consumers in the mobile phone, where a lot of the functionality that you use in applications today can be replaced using this more easier channel to consume four channels.
It provides a richer environment, we think this will drive a lot more traffic and revenues for Sinch. Next slide, please. A quick summary of the year so far. We see that the market continues to develop well. There is a strong demand for Sinch products and services. We have, over the year, increased our organic growth with 8%. In general, integrations of the acquired businesses progress well. We are updating our core platform to efficiently handle integration in parallel to develop RCS and customer specific projects. It has partly affected our focus. Investments in the platform will continue at this high level until Q1 2018. We can then realize additional cost synergies of SEK 25 million. Europe continues to be a competitive market, while U.S. and Asia develop well. Next slide, please. Sinch position continues to be strong in the marketplace. We increase our market share.
We're creating additional economies of scale, adding new products and services that generate long time value with our customer relationships. We are winning new high potential customers that we have not seen the full effects on yet, and our position in the marketplace has been confirmed by ROCCO Research, that named us the number one provider for Application-to-Person messaging. Looking at our priorities, the first half year, we were aggressively consolidating the marketplace. The second half year of 2017, we are consolidating our internal position, making sure we have the platforms to continue to be aggressive in the marketplace going forward. Streamlining our processes and support functions, investing a lot in our platform. That will support further growth in 2018 and beyond.
We will continue to have acquisitions as part of our core strategy moving forward. We're looking forward to entering 2018, where we see the full effects of the investments we made in our platform during the second half of 2017, consolidating the acquisitions we've done so far, but also looking forward and adding new acquisitions and growth to our business. In that, I'm going to hand over to Odd Bolin, the CFO, to go through the Q3 numbers.
Thank you. We have a number of slides with diagrams and figures. I will actually not go through them in detail, but rather jump directly to slide number 12, where we have the financial comments. Thank you. Starting on the group level, a few issues that should be pointed out that affects the group. The foreign exchange fluctuations we have seen over the quarter has affected EBITDA and adjusted EBITDA by minus SEK 8 million. Meaning that if the currency exchange rates had been stable, we would have reported somewhat higher numbers than we report now. Those are due to revaluations of operational gaps in assets, primarily accounts receivable and accounts payable. We've seen, during the quarter, temporarily weak cash flow due to the increase in working capital. We don't expect that to be anything but temporary. There has been no fundamental changes to the working capital situation.
It's more of a slight timing effect. We repaid the loan we took up for the acquisition of Dialogue during the period. We also started our scheduled loan amortizations June this year. Next slide, please, number 13. Enterprise division financial developments in the third quarter. As Johan pointed out, we have seen a continued organic growth in the number of transactions, roughly 11% year-on-year in comparable units, meaning the enterprise division excluding Dialogue and Xura. Currency effects in combination with certain price pressure in Europe results in flat organic revenue growth. We see continuing good developments in the U.S. and Asia with strong momentum, a number of new large enterprise customers coming in. Our focus on integration has impacted the organic growth in Europe.
Even though we have seen an increasing number of transactions, we need to focus more on margin development. We can also do more to sell to new clients. We're taking actions to increase focus on new sales and large enterprises in Europe. The gross margin was affected by prices in Europe, but also the fact that we have increasing traffic costs of goods sold with the U.S. operator that is passed on fully to customers. It doesn't impact our gross profit, but it does have an impact on the gross margin. As we communicated in the Q2 report, we have also had some higher costs of goods sold with operators in the U.K. that we have only been able to partly pass on to our customers. That has had a negative and continuing impact on our gross margins.
As pointed out by Johan, the technical platform, Nova, is supposed to be ready by the first quarter of 2018. We've had some delays due to the fact that we've been using development resources for certain other customer projects and new services projects. We expect it to be ready in the beginning of 2018. We expect the lion's share of customers to be migrated over to Nova by the first half of 2018, which will increase our cost efficiency further. We think we can get another SEK 25 million of cost synergies realized once all the customers are migrated. That is a bit more than we thought originally. Those are mostly from the Xura and Dialogue acquisitions, where we had a slightly more conservative view on what we could achieve earlier on.
It's also important to point out that once Nova is in place, the kind of acquisitions we've done with Mblox, Dialogue, and Xura will be simpler to pursue. Migration will be quick, we will be able to realize synergies faster than we've been able to do with these three first acquisitions. We are aiming to be the lowest cost per message provider in the market with the highest quality, and this will be facilitated by Nova. We already have what we believe to be very competitive cost structure, we think we can do more. Within the traditional messaging business, that's a very important competition factor. Next slide, please. Operator division financial developments. As we pointed out, we had a major capacity expansion project that was being finalized during the quarter, boosting EBITDA. We have no similar projects planned at this time.
Those are coming every now and then based on when our customers reach certain limits or in terms of number of subscribers, for example, we cannot forecast that very well. We have nothing that we are planning right now. The underlying business is developing according to plan, though. I wasn't going to say much more. All the numbers are there, I'll be happy to take questions on the more detailed figures.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause just for a moment to allow everyone an opportunity to signal for questions. We take first question from Staffan Åberg. Please go ahead. Your line is open.
Thank you, good morning. Price competition in Europe, smaller companies fighting for survival, it sounds like you're saying. From your perspective, for how long is that type of behavior sustainable?
What do you mean from our perspective? How long we can live with that?
Your view of these smaller competitors in Europe, for how long can they press prices and survive?
That's obviously depending on each and everyone's individual financing capacity. The view we have, that as we've communicated before, we see, I wouldn't say everyone, but pretty close to everyone in the market being in a mood where they would like to discuss the potential acquisition by us. We interpret that as them being in a not so good position when it comes to long-term survival.
I think we also see a lot of security demands from the marketplace, GDPR coming into place next year, where you raise the bar in the marketplace and these smaller companies will have more difficult to take on the investments required to meet the new standards that are set by regulators and security demands. That play to our benefit.
We do see more and more customers and potential customer asking specifically for things like ISO 27001 certification. We don't believe many of our competitors have the skills and the resources to implement that.
We're also taking proactive measures in launching more sophisticated service bundles around this and move a little bit higher up in the value chain to protect us from some of the price pressure in Europe. We're taking several actions when it comes to sales segmentations, who we target, but also in sort of the product development.
One final question for now, maybe I'll come back later, but it seems like Mblox is rapidly deteriorating. What are the main reason for that? Do you see an end to that trend?
Can you please clarify what you mean by deteriorating?
If you back out the organic growth and assume that your classic part of CLX is growing in line with what you've reported previous quarters, it indicates that Mblox is shrinking the volumes generated in that business.
I think you should see it from a marketplace perspective, where we see continuous good development in the U.S. We have had some price pressure in Europe, and Asia Pacific is sort of stable to the good side. I don't think that you can isolate that into the different acquired units. It's much more related to the marketplace.
Okay. You wouldn't agree with the idea that the volumes and income you generated in Mblox a year ago, compared to now, has shrunk by quite a significant amount?
Not at all. If you look at the U.S. marketplace, the business that we acquired through Mblox has been developing very well.
I think what you're seeing in Europe is that price points in Europe are much higher. If you have a more competitive environment in Europe, you will have a higher effect on the top line than, for example, if in the U.S., if that business develops well, price levels are much lower, that will have a smaller effect on top line.
Okay. Thank you.
We take next question now from Thomas Heff, from Danske Bank. Please go ahead. Your line is open.
Thank you. Thomas Heff here with Danske Bank. Two questions, if I may. Firstly, I think you mentioned 11% volume increase on messaging. Just curious what that looks like in Europe, if you continue to grow volumes in Europe as well, or how competition is affecting messaging volumes. Secondly, you mentioned going up the value chain, Johan. Just be curious to hear any sort of examples or what that could be in terms of product development. Thank you.
Yes, we do see continuing growth in Europe.
Asking about what kind of services we talked about before are verification services. It could be sort of simple to use campaign management solutions. We're seeing some specific security solutions for the bank sector. Those are a couple of examples we see in the marketplace, where we move slightly moving up the value chain and provide more sophisticated services, more than just the core communication layer.
That's helpful. Perhaps to follow up on the messaging volumes. If Europe is growing messaging volumes in line with the group, then at 11% or anywhere near there, it would seem that the trouble in Europe is not volumes, but just pricing. If that's the case, a little curious to see how increased marketing can sort of offset that. Is the idea then to market and sales more so that you grow up volumes even more to offset the price pressure? Thanks.
Yes. I think we haven't communicated exactly from what region the various sort of transactions come from. I think it's fair to say, given the balance here, that the transaction volume increase has been higher in North America than it has been in Europe.
That's good. Again, in what ways can increasing sales and marketing relieve price pressure in Europe if price pressure is the problem rather than volume? Thank you.
I think we're seeing a little bit of a shift in our customer base in a couple of countries in Europe, where we are moving from working with other sort of parties that are lower in the value chain, shifting that focus to work with enterprises instead. Those are longer-term contracts, more stable revenues, and we can also then sell more sophisticated service bundles to that customer segment.
All right, more direct end clients rather than selling to other A2P players, it sounds like.
Yes. That's a good interpretation.
Thank you.
Ladies and gentlemen, as a reminder, please press star one to ask the questions. We take next question now from Staffan Åberg from Carnegie. Please go ahead, your line is open.
Yeah, just some small modeling questions here. Looking at the net financial line, and thinking about that going forward, given your current balance sheet structure, what is a reasonable run rate there, would you say?
Reasonable run rate in terms of?
Net financials.
I think we will see a decrease in those numbers as we have recently restructured the former Mblox group, meaning that we can dissolve some of the internal loans. It's a little bit too early to give any more precise forecast on those numbers. The background is simply that the restructuring in the Mblox group has been a somewhat complicated exercise due to different tax regimes, and we're not 100% ready with that yet.
Okay, and.
That's where those financial net numbers come from. Those are revaluations of internal loans, mostly.
On your report, SEK 21 million in other operating expenses, can you please clarify what that relates to?
Hang on. Let me come back to that in a few minutes and make sure I have the right things. Please keep going.
The final question, excluding the project in the Middle East in the operator division, what would you say the EBITDA was on an underlying basis in the quarter?
We haven't communicated the precise impact of those projects on each and every quarter. What we've said and what we will say is that had a substantial impact. Looking at the size of the project that we communicated last year, I think you can get a pretty good grip on that. I can't be any more detailed than that. We said last year that project was around 30 million SEK altogether.
That has been split out over several quarters. I just want to clarify, it's not 30 million SEK in this quarter, but that was throughout several quarters.
If you need more time to figure out the 21 million SEK, I can also.
Yeah. You said the 21 million SEK. Those are mostly the revaluation effects that comes from the revaluation of operational debt.
The final question, just to be clear here on the market share, given your organic growth was negative 2% this quarter, you've stated that you see a market growing by around 10%, which I guess relates more to the number of messages sent. How would you phrase your market share progression in the quarter?
I think overall, including acquisition, we continue to grow at a very good rate.
On an organic basis.
Yeah. On organic basis, due to the focus we had and the investments we're making in the platform, but also to integrate the acquisitions, we had a temporary slowdown in organic growth. How that affects our market share, we see this as a temporary slowdown in our growth strategy. I don't see that affecting our position in any sort of way.
Okay, thank you.
Just to give you further clarification apart from the revaluation effects, we report those gross. That's important to remember. The positive revaluations effects are in other operating income. The negative ones are in other operating expenses. In other operating expenses, we also have customer losses. We don't have much customer losses, we have a little bit of that.
Thank you for that.
There's no further questions at this moment.
We have a couple of questions coming in through the chat channel here. I'm going to read them and then answer them, and Odd will help me out on some of the answers. Gross margin pressure also seen in the U.S. as an operator raised traffic prices. Has this stabilized or will this negative trend continue? I think it's important, answering this question, to state that we've been able to pass all of that onto our client base. One operator in the U.S. increased the pricing for messages on their network, but we've been able to pass 100% of that onto our customer base. Some negative organic growth in enterprise in the quarter due to Mblox losing out some wholesale. Can you comment on the organic growth outlook for enterprise for Q4 and 2018?
This relates to our discussion on the situation in Europe, where we are doing transformation in our customer base from a lower level in the value chain to now focus on higher up in the value chain, to reduce that price pressure. The outlook for enterprise for Q4 and 2018. Q4 is typically a very strong quarter, just from a seasonal effect. We see that trend. We don't expect anything that would be different this year in that perspective. For 2018, we have financial targets that are known by the marketplace, and we will continue to guide towards them. Then Odd, I have a question for you. Xura had a pro forma SEK 9 million net margin of 2.6%. Is this in line with expectations?
Could you please, had a pro forma?
Xura had a pro forma SEK 9 million net margin of 2.6%. Is this in line with expectations?
SEK 9 million of 2.6%?
Oh, nine months, sorry. Net margin.
Okay. We don't call it Xura, it's nowadays CLX Communications Germany. We have seen the same effects in the German market as we've seen in the rest of Europe with price pressure. We see a need to increase the margin in Germany for sure.
When do you project Sinch to be on a break-even level? We expect Sinch to be on a break-even level in 2018. We're looking at some of the mid-quarters. We have another question here. You highlight the number of regulations coming into play and driving investment needs for the A2P vendors such as yourself. Any comment on your own investment need to cope with this would be helpful. Any significant ramp in R&D costs ahead? I think this is part of the project that we are now undertaking, and that we talk about in this quarterly report that has slightly dropped our focus on sales and hence the organic growth number. Taking GDPR into account, and that is part of that project. It's a big undertaking.
We are also developing a lot of functionality to support future acquisitions and help us to more rapidly integrate those into CLX, but also to run our business more efficiently. This is a lot of business support systems around our core transaction platforms that allows us to run that platform in a much more efficient manner. Those investments are now at top level and will start to come down as those projects finalize in Q1. There will be no significant ramp in R&D costs ahead. We're rather saying that we are at a very high level now, and that has a small potential going down. Good, with that, we don't see any more questions from the audience. I want to thank you for listening in to our Q3 report, and wish you a good day.