Earnings Call: Q3 2017

Nov 7, 2017

Thank you, and good morning, and welcome to CLX Q3 Report. In the room, it's Nijo Van Hedberg and also Odd Bolline CFO. So we'll start with the Slide 1 in the deck and talk about then repeating CLX strategy. We have during the last 2 years added a lot of transactions on our network. This is a game of scale. And we're continuing to execute on that. 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 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 and RCS' rich communication services, We see this as a great growth potential for CLX. This is a standard driven by the GSMA. And 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 for channels. It provides a richer environment And we think Next slide, please. So a quick summary of the year so far. We see that the market continues to develop well. There's a strong demand for CLX products and services. We have, over the year, increased our organic growth with 8%. The general integrations of the acquired businesses progress well. We are updating our core Platts formed 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 25,000,000. Europe continues to be a competitive market, while U. S. And Asia develop well. Next slide, please. Select 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 rocker research that named us the number one provider for application to person messaging. So 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 and 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. And 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 twenty seventeen. Consolidating the acquisitions we've done so far, but also looking forward and adding new acquisitions and growth to our business. And in that, I'm going to hand over to Odd Berlin, the CFO, to go through the Q3 numbers. Thank you. We have a number of slides with the, with diagrams and figures. I will actually not go through them in detail, but rather jump directly to Slide number 12. Or we have, some of the financial comments. Starting on the group level, a few issues that needs to be, you should be pointed out that affects the group. The foreign exchange expectations we have seen over the quarter has affected EBITDA and adjusted EBITDA by minus 8,000,000 meaning that if the transaction exchange rates had been stable, we would have reported somewhat higher numbers than we would know. Those are due to revaluations of operational, debts and assets primarily accounts receivable and accounts payable. We've seen a during the quarter temporarily weak cash flow due to the increase in working capital, we don't expect that to be anything that is anything but temporary. There has to be no fundamental changes to the working capital situation is more of a slight timing effect. We repaid the loan. We took up for the acquisition dialogue during the period. And we also started our scheduled loan amortizations, June, this year. Next slide please. Number 13. Enterprise Activation Financial Development 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, in comparable units, meaning the enterprise division, excluding Dialog and Syrup. But currency effects in combination with certain price pressure in Europe, results in flat organic revenue We see continuing good developments in the U. S. And Asia with strong momentum, a number of new large enterprise customers coming in. But 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, on, margin development, and we can also do more to sell new clients. So we've taken actions to increase focus on sales, new sales and launch enterprises in Europe. The gross margin was also affected by prices in Europe, but also the fact that we have seen increased we have increasing traffic costs costs or goods sold, with the U. S. Operator, that is passed on fully to customers. So 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 cost of goods sold with operators in the UK that we have only been able to partly pass on to our customers. So that has has had a negative and continuing impact on our gross margins. As pointed out by you on, 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 projects customer projects and new services projects. But, we expect it to be ready beginning of 2018. And we expect the lion's share of customers to be migrated over to Nova by the first half of twenty eighteen, which will increase our cost efficiency further And we think we can get another $25,000,000 of cost synergies realized once all the customers are migrated. That is a bit more than we thought originally. Those are mostly from the sewer 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 acquisitions, kind of acquisitions we've done with Enbloaks Dialog and Sura will be simpler to, to pursue, migration will be quick and we will be able to realize synergies faster than we've that we've been able to deal with these 3 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 NOLA. We already have what we believe to be very competitive cost structure, but we think we can do more. And within the traditional messaging business, that's an important and a very important competition factor. Next slide please. Operated Aviation Financial Developments, as we pointed out, we had a major capacity expansion project that was being finalized during the quarter listing 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 a number of subscribers, for example, but we cannot forecast that very well. So we have nothing we are planning right now. The underlying business is developing according to plan No, I wasn't going to say much more. All the numbers are there, and I'd be happy to take questions on the more detailed figures. Thank you. We take first question from Stefan Aberc. Please go ahead. Your line is open. Thank you and good morning. So price competition in Europe, smaller companies fighting for survival, it sounds like you're saying. But from your perspective, for how long is that type of behavior sustainable? What do you mean from our perspective? How long we can be with that? Do you have a full review 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. But here, we have And that as we've communicated before, we see, I want to say, everyone, pretty close to everyone in the market being being in a mood where they would like to discuss the potential acquisition by us. And we interpret that as them being in a in an also good position when it comes to long term survival. I think we also see a lot of security demands on the marketplace, GDPR coming into place next year where you raise the bar in the marketplace and the smaller 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. So that played to our benefit. Yes. We do see more and more customers and potential customer asking specifically for for things like ISO 27,201,001 certification. And we don't believe many of our competitors have the skills and the resources to implement that. But we're also taking proactive measures in 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. So we're taking several actions when it comes to sales segmentations who we target but also in sort of the product development. And one final question for now. Maybe I'll come back later, but it seems like MBLOC is rapidly deteriorating What are the main reasons for that? And do you see an end to that trend? Can you please clarify what do you mean by deteriorating? Well, if you back out the organic growth and assume that your classic part of CX is growing in line with what you have reported previous quarters, it indicates that M blocks is shrinking the volume 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. So I don't think that you can isolate that into the different acquired units. It's much more related to the marketplace. Okay. So you wouldn't agree with the idea that the volumes an income you generated in M blocks 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 Amdocs has been developing very, very low. I think what you're seeing in Europe is that price points in Europe are much higher. So 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. So that will have a smaller effect on line. Okay. Thank you. We take next question now from Thomas at from Danske Bank. Please go ahead. Your line is open. Thank you. Thomas here with Danske Bank. Two questions if I may. Firstly, I think you mentioned the 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 and messaging volumes? And then secondly, you mentioned going up the value chain, you want just to be curious to hear any sort of examples of what that could be in terms of product development? Thank you. Yes, we do see continuing And so asking about the what kind of services we are So services we talked about before are verification services. It could be sort 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. Thanks perhaps to follow-up on the messaging volumes. If Europe is growing, messaging volumes in line with the group, then that's 11% or anywhere near there, it would seem that the trouble in Europe is not volumes, but just pricing. And if that's the case, a little curious to see how increased marketing can sort of offset that, or is the idea then to to market and sales more so that you grow up volumes even more to offset the price pressure? Yes. So and I think, we haven't communicated exactly from what region the various sort of transactions come from. I think it's fair to say giving the balance here that it did transaction volume increase has been higher in North America than it has been in Europe. That's good. But then again, sort of in what ways can increase in sales and marketing relieve price pressure in Europe. If price pressure is the problem rather than volumes. Thank you. So I think we're seeing a little bit of a 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 with the enterprises instead. And those are longer term contracts, more stable revenues, And we can also down sell more sophisticated service bundles to that customer segment. All right. So more direct end clients rather than selling to other ATP players, it sounds like. Yes, that's a good interpretation. We take next question now from Stefan Aberg from Carnej Please go ahead. Your line is open. Just some small modeling questions here. Looking at the financial line, and thinking about that going forward, given your current balance sheet structure, what is a reasonable run rate there? Would you A reasonable run rate in terms of? Net financials. I think, yeah, we will see a decrease in those, numbers as we have recently restructured the former M blocks group, meaning that we can, dissolve some of the internal loans but 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 Amdocs Group has been somewhat complicated exercise due to different tax regimes and we're not 100% ready with that yet. Okay. But that's where the financial those financial net numbers come from. Those are revaluations of internal loans mostly. And on your reported $21,000,000 in other operating expenses, Can you please Let me come back to that in a few minutes. I'll make sure I have the right things. If you keep going. And 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 in each and every quarter. So what we've said and what we will say is that we had a that had a substantial impact. Now looking at the size of the project that we communicated last year, I think you can get a pretty good grip on that. But I can't be any more detail than that. We said last year what that project was run 30,000,000 Swedish crowns altogether. But that has been split out over several quarters. Just want to clarify, it's not 1,000,000 in this quarter, but that was throughout several quarters. If you need more time to figure out the $21,000,000, I can also add. Well, you said the $21,000,000, those are mostly, the revaluation effects that comes from the revaluation of debt operational debt. All right. And the final question, just to be clear here on the market share, given your organic growth was negative 2% quarter. And you stated that you see a market growing by around 10% which I guess relates more to the number of messages sent, but how would you phrase your market share progression in the quarter? As I think overall, including acquisition, we continue to grow at very good rate. On an organic basis? Yes. On organic basis, I mean, 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 sort of market share I think that this is just a temporary, we see this as a temporary slowdown in our sort of growth strategy. So I don't see that affecting our position in any sort of way. Great. Thank you. Yes, to give you further clarification, because apart from the revaluation effects, we, report those gross. That's important to remember. So the positive regulations or in other operating income, the negative ones are in other operating expenses. But in other operating expenses, we also have, potential customer losses. We don't have much customer losses. We have a little bit of that. Thank you for that. There's no your questions at this moment. All right. So we have a couple of questions coming in through the chat channel here. So I'm going to read them and then answer them and Ot will help me out on some of the answer So gross margin pressure also seen in the U. S. As an operator raised traffic prices, has this stabilized or will this negative trend continue. So I think it's important answering this question. To state that we've been able to pass all of that onto our client base. So 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 M blocks losing out some wholesale. Can you comment on the organic growth outlook for enterprise for Q4 and 2018. So this relates to our sort of discussion on the situation in Europe where we are sort of transforming due to transformation in our customer base from sort of a lower level in the value chain to now focus on high rough in the value chain. To reduce that sort of price pressure. And the outlook for enterprise will Q44 2018. So Q4 is typically a very strong quarter, just from a seasonal effect. And we see that trend. We don't expect anything that would be different this year in at place, and we will continue to guide towards them. And then, OddDA, I have a question for you. Sura had a pro form a $9,000,000 net margin of 2.6 percent. Is this in line with expectations? Could you please have a pro form a? Sura had a pro form a 9,000,000 net margin of 2.6 percent. Is this in line with expectations? 9000000 of 2.6%. Oh, 9 months. Sorry. That's hard. Okay. Suraj has or as we we don't call it surveys nowadays, CLAX Communications Germany, but we have seen the same effects seen in the German market as we've seen in the rest of with price pressure. And we, we see a need to increase the margin in Germany for sure. So when do you project Cinch to be on a breakeven level? So we expect Cinch to be on a breakeven level in 2018, and we're looking at some of the mid quarters. And then we have another question here. You highlight the number of regulated 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 and a significant ramp in R&D costs ahead. So I think this is part of the project that we are now undertaking and that we talk about in this quarterly report that has sort of slightly dropped our focus on sales and hence the organic growth number. So taking GDPR in account and that is part of that project. And 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. And 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 will are now at sort of top level and will start to calm down as those projects finalize in Q1. There will be no significant ramp in R&D costs ahead. We're already saying that we are at a very high level now. And that has more potential going down. Good. And with that, we don't see any more questions from the audience. I want to thank you for listening into our Q3 report and wish you a good day.