Earnings Call: Q2 2017

Jul 21, 2017

Welcome everyone to this CLX interim report for Q2. And the next slide. Let's move on directly to the 2017 half year summary. So to summarize the activity for the 1st 6 months, we have an high activity across all of the business. We continue to see a strong demand for our products and services. We completed 2 acquisitions, Sura for the German speaking, Congress and strong with banks And Financial Institutions. And then dialogue directed toward the Asia Pacific markets. We've seen organic growth of 19% for the 1st 6 months. And we successfully closed the direct share issue creating capacity for further growth in the business. Thanks, Clive. And some comments to our Q2 performance. Sales continues to grow and reach SEK 745,000,000 in the quarter. Gross margin been somewhat lower than in the last quarter, mainly due to the following reasons. An increase in the traffic cost in the UK market that we could own partly only forward to our customers. Specifically for April some seasonal effect where Easter 5 weekends created lower business volumes. We have seen a positive development during the last 2 months of the quarter according to plan with good growth and profitability. We've seen a strong market in North America with a very good pipeline and some but some more challenging market conditions especially in Asia Pacific where we foresee some price pressure. We have had temporarily lower gross margin in the operator division due to more hardware sales in this quarter specifically. And we see that as a temporarily effect. The EBITDA margin for the quarter was 9.9%. And then a quick summary of the Dialog acquisition and the benefits from that acquisition that we closed in this quarter. So this was an acquisition to enter the Asia Pacific markets that we have somewhat been missing in our product portfolio. So further expanding the CLX Tier 1 super network. Add innovative security solution that we can help extract more margins from our tier 1 super network? And this acquisition will add net synergies of approximately 1,000,000 in the coming 12 to 18 months. Next slide, please. And then an update from the integration work and from the acquisitions. And for IoT. And en blocs, we outperformed our targets for operational cost synergies, From a financial perspective, we now see this acquisition closed, although we will have some more integration work to complete during the remaining part of 2017. The integration of Surin Dialog is proceeding well and will continue into 2018. And we expect to achieve full financial effects of these acquisitions during 2018. Cinch continues to develop well. We have identified many cross selling opportunities in the business. Some of them are voice communication to banks and tax lead generation companies, but also video for training and educational purposes. Internet of things. Development of services within internet of things is also proceeding according to plan. We see many exciting business opportunities, but it will take time to achieve substantial revenues in this area. Next slide please. So we are on a long term journey with the CLEX. And we continue to create a stronger position in the marketplace. Creating further economies of scale. We're adding new services and product that creates long term value for CLX. We are continuing to win high potential customers that will continue to fuel organic growth in the business. Our position was also confirmed by rock research launching a market report. Where we were particularly strong in the areas of service quality, reliability and technical expertise. So our strategic priorities and for growth in the future, we are focus on organic growth during the next 6 months to achieve full economies of scale from the acquisitions we have already made. Consolidating our business platforms and support systems. Going into 2018, we are we feel that we are in a position to continue to execute on our M and A strategy. To achieve further economies of scale in the business. And with that, I'm handing over to Odd Berlin, to comment further on the financial numbers. Thank you. All right. Next slide please. The name called GrowthTrack, One called Grabrack, okay. Well, I wanted to start by pointing out what we've seen what has happened in the business over the last couple of quarters before focusing on this particular quarter. We've had a major growth over those last quarters, obviously fueled by the acquisitions we started doing last year. But the growth continues. And we have had gross margin that we feel has been quite stable and sufficient at this level that we see right now. Next slide is You can see also the profits that we have office at BNB producing, during this time period had also grown obviously very rapidly. So this is a background that I think is important when looking at this this quarter. Next slide please. Starting by the first half of the year, the time period that we're reporting in the interim report. We saw net sales increased by close to 150% versus the same quarter last year. Organic growth was 19%, which is pretty much in line with what we expect is reasonable over time, even with a larger base now, gross profit increased by 190% and we had a gross margin of 27.9 percent, 28% with the first half year. Adjusted EBITDA adjusting for, acquisition integration and restructuring costs were 155,000,000 within an EBITDA margin of 11%. The net profit was $32,000,000 and I will come back to that later when talking about tax rate. For the quarter, the 2nd quarter isolated, we had 157% growth in revenue. Organic growth was 18%. The gross margin increased by almost 200% And the gross profit increased by almost 200%. We had a gross margin of 25.6% for the quarter. We see slight deviations margin wise from quarter to quarter. That's, we consider that to be normal market fluctuations. We see some changes in different markets. Sometimes, margins are coming down a little bit. Sometimes they're coming up a little bit. We feel that we have a reasonably stable margin over time. Adjusted EBITDA, 74,000,000 It's much in line with what we've had during the last few quarters. And net profit for the quarter though amounted to minus $1,200,000. And that takes us to the final slide. Next slide please. Some notes on the financials. Two things that I want to point out one is tax rate. That can be that can that may look a little bit confusing The reason for that is that we finalized the purchase price allocation for the Amdocs acquisition during the second quarter, that was a rather substantial exercise because we felt we there was a need to analyze and investigate whether we could, we'll be able to, use the deferred tax assets that came with the Amdocs acquisition. The conclusion is that we can do that and we have activated SEK 155,000,000 on the balance sheet. And thereby decreasing goodwill with the corresponding amount. Now this deferred tax that we now book every quarter going forward is not affecting cash flow. It's decreasing the activated amount on the balance sheet, but only actual tax affects tax flow. Going forward, we expect the effective tax rate to be in line with what we've seen for the first half of this year. But the difference between the first and the second quarter is pure accounting effect due to the fact that the PPA analysis is PPA analysis wasn't ready until the second quarter. Also wanted to say that point out that the financial net is Although the net is large, the gross amounts plus or minus are quite large, which is due to substantial currency effects, that comes from revaluation of our financial assets and liabilities, they net quite well, but that the gross amounts are large because we have right now at the end of the quarter, we had almost 1,000,000 Swedish pounds of outstanding credit facilities that has to be revalued every quarter and that can give quite substantial effect, gross effect. All right. So let's open up the questions. Thank If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll pause for just a moment to announce everyone that an opportunity to signal. Okay. We'll now take our first question from Stefanard from Carnegie. So first question is, what kind of transparency do you have on further needs of restructuring charges over the coming quarters? We have taken we have we have booked a restructuring reserve, based on what we expect to see in in the acquisitions we've done, we don't foresee any need for anything more than that the restructuring charges are mainly due to, severance payments, etcetera. For employees that will be that won't stay with us after the restructuring is is done and we have a good we have good insight into who that's going to be and we also communicated to those specific employees that this is the case. So we don't expect to see a need for any more restructuring charges. Given your market outlook and your offering, what range of organic growth do you think is likely we will see over the coming year? The operator division. We have a very strong we have a very we have a long term growth plan for the operator division. That we haven't, made public in all details, but it does include a considerable growth over the next couple of years. That is based on broadening product portfolio. And a, as you know, we have also worked quite a bit with changing our product offering towards managed services. We expect that to have considerable effect going forward, but we haven't communicated any growth targets for the duration. No. Okay. But just to answer considerable growth, what do you mean by that? And the managed service, when do you think that will start to result in higher volumes? Like I said, we haven't communicated a number around that. We're making continuous progress in our managed service offering. We already had several customer on board. But at this point in time, we have issues not to communicate a specific number on growth in the operator division. If I can rephrase that then, what kind of level would you be disappointed to see over the next year? Well, as you said, just rephrasing is the same question that we have communicated. So it's not something we can answer wish every way you rephrase it, but we do have an ambitious growth plan for the division. That's all we can say right now. Fair enough. And final question for now. And how would you describe the progress of our CS? And when do you believe that could begin to be a substantial part of your offering? So it's it's still very early. We think that there is GSMA show in San Francisco coming up now after December, that will be a big launches event for RCS and of course continuing to launching that throughout the the remaining part of 2017. For RCS to be successful, mobile operators needs to adapt the technology into the network. So there is, of course, a it will take some time until RCS is sort of a worldwide standard. But we are seeing sort of positive mobile operator momentum in picking up the service in some of the key markets that we will think, drive a positive momentum for RCF going forward. And we are well positioned to take advantage of that. Okay, thank We do have our next question from Daniel Jewerberg from Handelsbanken. Please go ahead. Thank you so much. Starting my first question on Dialog, it presents in the report both the results the performance of first half and also the result in your books, including restructuring charges. The question is for the pro form a, is that also including extraction charges for dialogue and how large was the restructuring for dialogue in the quarter? Yes, the pro form a is, business as you shows what it would look like if we had bought them on the 1st January. So we haven't communicated the split in restructuring charges between the different entities. But obviously, during the second quarter, the dialogue of the company we acquired and primarily the resection charges belongs to dialogue for the quarter. Yes. Because you had like 7.3% margin until 10th May, from 1st January in that in dialogue and then it was including restructuring charges result of minus 2. So, so, but again, the question from looking at the first half of the $8,600,000, right? Is that including restructuring charges or not? $6,000,000 that you have. Which particular figure are you looking at? That dialogue you're right in the report on page 19, the net result of the dialogue, 8,600,000. Let me check that. I'll have to get back to you in order to make sure that it's not the same because we have numbers in a different It's a table on page 20 that gives you the figures. If we can get back to that. Is another question on the planning assumption. Can you say something on the gross margin level in dialogue gap because we will see, of course, more revenues coming into Q3 here, from from dialogue. To have to think on gross margin from because it's the main impact? We see very good gross margin in dialogue. We have that it's pretty much in line with what we see in the group. Okay. And also if you could spare with me the organic growth seen in Amblox in Q2 so we can think about the how to think about the organic growth coming in with Amdocs going forward? We haven't done that sort of split actually. It's a it's very much question of you define organic growth. What we've said is organic growth and based on what we had, before the well, the second quarter last year, What we can say is that we do see a very strong development. We do see very strong developments in the U. S, which is, which was Enbloc's territory before we acquired them. So we hope we will see continuing good growth in that market too going forward. But there is no after the acquisition and after the merger of the client basis, There's no major difference between the previous Ambrox client base and the previous CLX client base. We work through it the same way. Yeah. And just how to think, yeah, I don't know, yeah, on the, operator side, I thought that entering more investment in data centers on the platform as a service, etcetera, that we will see more like recurring software revenues rather than hardware, but but now now we saw hardware having a, coworker. Can you a little bit how and then mid to long term, how we have to think about the operator business in terms of mix? So I think that is a correct observation, but of course, it takes time to get more to a managed service model. And it's still the if you want to the software license model is still the predominant part of the operated division, although we are shifting that slowly. But as that gets more important, your assumption is correct that we should see less on the hardware in the operator division. And then the very last question, I guess it's fair then to believe that the provision is down for restructuring charges of $16,400,000 will be the maximum we will see now in the second half for come under section? That's what we have calculated being the most realistic figure we can come up with. Thank you so much. We do have a follow-up question from Stephan Arberg from Carnegie. Please go ahead. Thank you. Just briefly on the UK, could you please try to quantify the impact from the higher traffic cost in the UK? For example, how much does that impact gross profit year over year? That's not something we've communicated, but it's it's a primary course beyond the fluctuations we see this quarter. And while I have you on the line, you've been talking about upselling to existing clientele. That strategy proceeding? And could you please exemplify with the real world example of that? And are you referring now to, for example, voice and video or am I thinking right then? Yeah. Yes. So, so for example, for voice services, We have for the bank customers that are specific use cases in the call center environment where they want to reach their customers and they can complement their messaging service with the voice service to do so. We see, for example, in, in taxi companies where you want to have an anonymized number. For a driver and the customer. And so they cannot contact each other directly and we can provide the voice traffic and the numbers to protect the customer relationship for the tax lead generation company. So those are two examples where we see traction in the market where we can sort of upsell our messaging customer base also on to voice. For video, which is a, I would say, a fairly new service to the more get as such. We have seen a couple of use cases where dating services were in reduce video in a mobile phone environment for online dating, but we've also seen it in the health care sector where you can speak to your doctor and you can have a video conversation with your doctor. So those are some example of use cases for video and for voice that we are seeing in the marketplace. But are you happy with the level of upselling you're seeing now? We have a large number of converged conversations going on. And we expect to see some of more of the financial results from that after, in the next couple of quarters. Okay. Thank you. When you say, are we happy? I mean, of course, we're not happy in the sense that we expect to see a lot more, but considering the time that is passed since the acquisition in Sol progressing as planned, yes? I'd like to come back to what Daniel asked about the restructuring charges. I think you're referring to page 20 and the tables And the second table, I assume that you're looking you're wondering whether the second table that shows the performer results as if the acquisitions have been taking place in the 1st January includes restructuring charges. And it does even though it doesn't say so in the description on the table. I was a bit confused when you said 2019 because identified it in 2019 in my report. We have a further question from Frederick Lisser from Ganske Bank. Please go ahead. Thank you. Good morning. Can you hear me all? Yes, we can hear you well. Thank you. Can you talk a little bit about the calendar effects Q2. And on your slide, so you comment about how you had the difficulties with that. And I understand that there are many companies that have had a pressure from that. You also talked about that you came out of the quarter with sort of a better pace during that part. So can you give us some sort of feeling on how we should view Q3 compared to Q2, given all these sort of details that that pressure you in Q2. Well, the beginning of the second quarter was, it contained a lot of days where we have slightly less traffic in the messaging business. We had Easter. We had 5 weekends in April. And that had an impact, because we only see roughly half the amount of traffic in a weekend day that as compared to the weekday. And also Easter is not a big shopping week And so that's also a weekend where we see less traffic than we do in normal weekday. We are not giving any guidance, but obviously the third quarter contains quite a bit of vacations globally. And you can see that from our historical figures that Q3 isn't normally the strongest quarter of the year. So this is something that the impact we've seen in Q2 is also something that will sort of remain in Q3 due to the vacations and then Q4 is the strongest quarter due to Christmas and everything around that or Well, normally in the messaging business, we do have effects, as I said, due to, well, pure calendar and Easter is an important calendar effect, vacations or obviously also an important calendar effect and the all the strong or important shopping weekends at the end of the year has an impact Definitely. Okay. Thank you. A further question please, if I may. On the synergy effect that we still have in front of us, you mentioned that MBLOCs have overachieved and that you're now sort of complete in that. My recollection is also that you've said that you will transition or move over large clients from Danblox platform to your own platform and that would yield further synergies coming, let's say, from now on 12 months, is that is that not the case anymore or or what is it that I'm missing there? Furthermore on the Dialog acquisition, I think you referred to £1,000,000 in synergies coming 12 to 18 months. Is that correct? And how how does that compare to the restructuring charges you're taking for that unit? Thank you. Starting with Amdocs. What we what we're seeing now is that the most of the operational cost synergies have been achieved. And when we say that, we're talking about decreasing the number of employees, decreasing the number of offices, office lease costs, etcetera, etcetera. On top of that, we still see potential synergies. And that those were the synergies we spoke about when we communicated the acquisition. But on top of that, we also see that we will become more efficient running everything on one platform. We believe that will have some positive effects too. It will make our operations more streamlined and more efficient, but those are not effects that we included in our initial estimate or what we thought the cost synergies would be. Same goes for dialogue. We have in, when we say £1,000,000 we mean, decreasing the number of MPs closing down offices, etcetera, etcetera. That will come over the next 12 to 18 months as we let people go as we close down offices that we no longer need, the restructuring charges or the severance payments, etcetera, that is going to be associated with that. But the cost synergies, the cost decreases is due to the fact that we won't pay those people and more salaries when they have, when they have left, etcetera. So you cannot they're obviously connected, but they're not comparable. The cost synergies is what we expect to be saving. The restructuring charges is the cost we need to that we will have in order to make those savings happen. We have a follow-up question from Frederic Lasser from Sanske Bank. Please go ahead. Thank you. I was a little bit late there thinking. Can I just have another question then on Synch? Can you talk a little bit about how that is progressing? You have come up in revenue terms a little bit. It's a revenue seems to be flat to quarter over quarter. You have some good experience from that when you have, you know, discussions with your clients. How should we, how should we expect that to progress? What is it that see here next in in terms of this, let's say, 1 year out would be interesting to hear. Yes. So this was a strategic acquisition from our part where we wanted to be more broadening our service portfolio to be able to serve our installed base with more services and upsell our installed base. But of course, also reach new customers. And this has been the case already in some of the discussions we're having where without having a broader product offering, we would not have been invited to the table. And as you pointed out, some of those, I mean, revenues have not yet materialized from those discussions, but we are having a lot of positive discussions and we feel confident that this was the right move for us to do in the market. Okay. It would appear we have no further questions over the phone at this time. All right. So thank you. And with this, we will end the call for this interim report for today. Thank you,