Welcome everyone to this CLX interim report for Q2. Next slide. Let's move on directly to the 2017 half year summary. To summarize the activity for the first six months, we have had high activity across all of the business. We continue to see a strong demand for our products and services. We completed two acquisitions, Xura, for the German-speaking countries, and strong with banks and financial institutions, then Dialogue directed toward the Asia-Pacific markets. We have seen organic growth of 19% for the first six months, and we successfully closed the direct share issue, creating capacity for further growth in the business. Next slide. Some comments to our Q2 performance. Sales continues to grow and reach SEK 745 million in the quarter. Gross margin been somewhat lower than in the last quarter, mainly due to the following reasons.
An increase in the traffic costs in the U.K. market that we could partly only forward to our customers. Specifically for April, some seasonal effect where Easter and five weekends created lower business volumes. We have seen a positive development during the last two months of the quarter according to plan with good growth and profitability. We have seen a strong market in North America with a very good pipeline, 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 temporary effect. The EBITDA margin for the quarter was 9.9%. Next slide, please. A quick summary of the Dialogue acquisition and the benefits from that acquisition that we closed in this quarter.
This was an acquisition to enter the Asia-Pacific markets that we have somewhat been missing in our product portfolio. 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. This acquisition will add net synergies of approximately GBP 1 million in the coming 12 to 18 months. Next slide, please. An update from the integration work and from the acquisitions and for IoT. Mblox, 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 Xura and Dialogue is proceeding well and will continue into 2018, and we expect to achieve full financial effects of these acquisitions during 2018. Sinch continues to develop well.
We have identified many cross-selling opportunities in the business. Some of them are voice communication to banks and taxi 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. We are on a long-term journey with CLX, and we continue to create a stronger position in the marketplace, creating further economies of scale. We are 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 Juniper Research launching a market report where we were particularly strong in the areas of service quality, reliability, and technical expertise.
Our strategic priorities and for growth in the future, we will focus on organic growth during the next six 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 feel that we are in a position to continue to execute on our M&A strategy to achieve further economies of scale in the business. With that, I'm handing over to Odd Bolin to comment further on the financial numbers.
Thank you. All right, next slide, please. The name called the growth track. One called [Reflec]. 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. The growth continues. We have had a gross margin that we feel has been quite stable and sufficient at this level that we see right now. Next slide, please. You can see also the profits that we have been producing during this time period had also grown obviously very rapidly. This is a background that I think is important when looking at 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 increase by +150% versus the same quarter last year. Organic growth was 19%, which is pretty much in line with what we expect. It's reasonable over time, even with a larger base now. Gross profit increased by 190%, we had a gross margin of 27.9%-28% for the first half year. Adjusted EBITDA, adjusting for acquisition integration and restructuring costs were SEK 155 million, within an EBITDA margin of 11%. The net profit was SEK 32 million, I will come back to that later when talking about the tax rate. Next slide, please. For the second quarter isolated, we had 157% growth in revenue. Organic growth was 18%. 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. 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 going up a little bit. We feel that we have a reasonably stable margin over time. Adjusted EBITDA, SEK 74 million. It's much in line what we've had during the last two quarters. Net profit for the quarter, though, amounted to -SEK 1.2 million. 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 may look a little bit confusing. The reason for that is that we finalized the purchase price allocation for the Mblox acquisition during the second quarter.
That was a rather substantial exercise because we felt there was a need to analyze and investigate whether we would be able to use the deferred tax assets that came with the Mblox acquisition. The conclusion is that we can do that, and we have activated SEK 155 million on the balance sheet, and thereby decreasing goodwill with the corresponding amount. 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 the actual tax affects tax flow. Going forward, we expect the effective tax rate to be in line what we've seen for the first half of this year. The difference between the first and the second quarter is the pure accounting effect due to the fact that the PPA analysis wasn't ready until the second quarter.
Also wanted to point out that 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 the gross amounts are large because right now at the end of the quarter, we had almost SEK 1 billion of outstanding credit facilities that have to be revalued every quarter, and that can give quite substantial effects, gross effects. All right. Let's open up for questions.
Thank you. If you would like to ask a question at this time, 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, please press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll now take our first question from Stefan Åberg from Carnegie. Please go ahead.
Thank you from Carnegie. Thanks. First question is, what kind of transparency do you have on further needs of restructuring charges over the coming quarters?
We have booked a restructuring reserve based on what we expect to see 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, et cetera, for employees that won't stay with us after the restructuring is done, and we have good insight into who that's going to be, and we also communicated to those specific employees that this is the case. We don't expect to see a need for any more restructuring charges.
Okay. Second question, looking at the operator division. 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?
Yeah.
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 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 division, no.
Okay, 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 Odd said, we haven't communicated a number around that. We're making continuous progress in our managed service offering. We already have several customers on board. At this point in time, we have chosen not to communicate a specific number on growth in the operator division.
If I can rephrase that, what kind of level would you be disappointed to see over next year?
Well, as you said, just a rephrasing of the same question that we haven't communicated, it's not something we can answer whichever way you rephrase it. We do have an ambitious growth plan for the division. That's all we can say right now.
All right. Fair enough. Final question for now. How would you describe the progress of RCS, and when do you believe that could begin to be a substantial part of your offering?
It's still very early. We think that there is a GSMA show in San Francisco coming up now after the summer. That will be a big launch event for RCS and, of course, continuing to launching that throughout the remaining part of 2017. For RCS to be successful, mobile operators need to adopt the technology into their networks. There is, of course, it will take some time until RCS is sort of a worldwide standard. 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 RCS going forward. We are well positioned to take advantage of that.
Okay. Thank you.
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. That's star one for a question. We do have our next question from Daniel Sjöberg from Handelsbanken. Please go ahead.
Thank you so much. Starting my first question on Dialogue. You present in the report both the result, the pro forma as of first half, and also the result in your books, including restructuring charges. The question is, for the pro forma, is that also including restructuring charges for Dialogue, and how large was the restructuring for Dialogue in the quarter?
The pro forma is booked in such a way that it shows what it would look like if we had bought them on the 1st of January.
Yeah.
We haven't communicated the split in restructuring charges between the different entities. Obviously, during the second quarter, Dialogue was a company we acquired, and primarily the restructuring charges belongs to Dialogue.
Yes, you had 7.3% margin until 10th of May, from 1st of January in Dialogue, and then it was including restructuring charges result of -2%. Again, the question, from looking at the first half of the SEK 8.6 million, is that including restructuring charges or not? SEK 6.6 million that you have.
Which particular figure are you looking at?
Dialogue, you write in the report on page 19, the net result of the Dialogue, SEK 8.6 million.
Page 19. Let me check that. I'll have to get back to you in order to make sure.
Okay. No problem.
Because we have numbers in a different capital.
No problem.
There is a table on page 20 that gives you the figures.
Okay.
We can get back to that.
Yeah, no problem. Another question on the planning assumption. Can you say something on the gross margin level in Dialogue? We will see, of course, more revenues coming into Q3 here from Dialogue. How to think on gross margin from, because it's mainly a package.
We see very good gross margin in Dialogue. We're happy that it's pretty much in line with what we see in the group.
Okay. Also, if you could spare with me the organic growth seen in Mblox in Q2, we can think about how to think about the organic growth coming in with Mblox going forward.
We haven't done that sort of split, actually. It's very much a question of you define organic growth. What we've said is organic growth based on what we had before the second quarter last year. What we can say is that we do see a very strong developments in the U.S., which was Mblox territory before we acquired them. We hope we will see continuing good growth, in that market too, going forward. After the acquisition and after the merger of the client bases, there's no major difference between the previous Mblox client base and the previous CLX client base. We work with them the same way.
Just how to think. On the operator side, I thought that entering more into investment in data centers and platform as a service, et cetera, that we would see more recurring software revenues rather than hardware, but now we saw a hardware-heavy quarter. Can you explain a little bit how in the mid to long term how we have to think about the operator business in terms of mix?
I think that is a correct observation, but of course, it takes time to get more to a managed service model, and the software license model is still the predominant part of the operator division, although we are shifting that slowly. As that gets more important, your assumption is correct that we should see less of the hardware in the operator division.
The very last question. I guess it's fair then to believe that the provision you've done for restructuring charges of SEK 16.4 million will be the maximum we will see now in the second half for coming restructuring.
That's what we have-
Yeah
calculated being the most realistic figure we can come up with.
Okay. Thank you so much.
As a further reminder, if you'd like to ask a question, please press star one on your telephone keypad. That's star one for a question. We do have a follow-up question from Stefan Åberg from Carnegie. Please go ahead.
Thank you. Just briefly on the U.K., could you please try to quantify the impact from the higher traffic cost in the U.K.? For example, how much does that impact gross profit year-over-year?
That's not something we communicated, but it's a primary cause beyond the fluctuations we see this quarter.
While I have you on the line, you've been talking about upselling to existing clientele. How is that strategy proceeding, and could you please exemplify with a real-world example of that?
Are you referring now to, for example, voice and video, or am I thinking right then?
Yeah.
Yeah. For example, for voice services, we have bank customers that are specific use cases in a call center environment where they want to reach their customers. They can complement their messaging service with the voice service to do so. We see, for example, in taxi companies where you want to have an anonymized number for a driver and the customer, so they cannot contact each other directly, and we can provide the voice traffic and the numbers to protect the customer relationship for the taxi generation company. Those are two examples where we see traction in the market where we can sort of upsell our messaging customer base also onto voice. For video, which is, I would say, a fairly new service to the market as such.
We have seen a couple of use cases, where dating services, where you introduce video in a mobile phone environment for online dating, but we've also seen it in the healthcare sector, where you can speak to your doctor, and you can have a video conversation with your doctor. Those are some example of use cases for video and for voice that we are seeing in the marketplace.
Are you happy with the level of upselling you're seeing now?
We have a large number of conversations going on, and we expect to see more of the financial results from that in the next couple of quarters.
Okay. Thank you.
When you say are we happy, 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, things are 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. The second table, I assume that you're wondering whether the second table shows the pro forma results as if the acquisitions had been taking place on the 1st of 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 19 because I couldn't find it in 19 in my report.
As a further reminder, if you'd like to ask a question, please press star one on your telephone keypad. We have a further question from Fredrik Lithell from Danske 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 in Q2, on your slides here, you comment about how you had difficulties with that. I understand that there are many companies that have had a pressure from that. You also talk about that you came out of the quarter with sort of a better pace during that part. Can you give us some sort of feeling on how we should view Q3 compared to Q2 given all these sort of details that pressure you in Q2? Thank you.
Well, the beginning of the second quarter contained a lot of days where we have slightly less traffic in the messaging business. We had Easter, we had five weekends in April, and that had an impact, because we only see roughly half the amount of traffic in a weekend day as compared to a weekday. Easter is not a big shopping weekend, so that's also a weekend where we see less traffic than we do in a normal weekday. We are not giving any guidance, but obviously, the third quarter contains quite a bit of vacations globally. You can see that from our historical figures that Q3 isn't normally the strongest quarter of the year.
This is something that the impact we're seeing in Q2 is also something that will sort of remain in Q3 due to the vacations. 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 pure calendar effects. Easter is an important calendar effect. Vacations are obviously also an important calendar effect. All the strong or important shopping weekends at the end of the year has an impact too. Definitely.
Okay. Thank you. A further question, please, if I may. On the synergy effects that we still have in front of us, Johan, you mentioned that Mblox have overachieved and that you're now sort of completing that. My recollection is also that you've said that you will transition or move over large clients from the Mblox platform to your own platform, and that would yield further synergies coming, let's say, from now on 12 months. Is that not the case anymore? Or what is it that I'm missing there? Furthermore, on the Dialogue acquisition, I think you referred to GBP 1 million in synergies coming 12-18 months. Is that correct? And how does that compare to the restructuring charges you're taking for that unit? Thank you.
Starting with Mblox. What we're saying now is that most of the operational cost engines have been achieved. When we say that, we're talking about decreasing the number of employees, decreasing the number of office lease costs, et cetera. On top of that, we still see potential synergies, and those were the synergies we spoke about when we communicated the acquisition. 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. Those are not effects that we included in our initial estimate of what we thought the cost synergies would be. Same goes for Dialogue. When we say GBP 1 million, we mean decreasing the number of employees, closing down offices, et cetera.
That will come over the next 12-18 months as we let people go, as we close down offices that we no longer need. The restructuring charges or the severance payments, et cetera, that is going to be associated with that. The cost synergies, the cost decreases, is due to the fact that we won't pay those people any more salaries when they have left, et cetera. They are obviously connected, but they're not comparable. The cost synergies is what we expect to be saving. The restructuring charges is a cost that we will have in order to make those savings happen.
Okay. Thank you.
As further reminder, if you'd like to ask a question, please press star one on your telephone keypad. That's star one for a question. We have a follow-up question from Fredrik Lithell from Danske Bank. Please go ahead.
Thank you. I was a little bit late there thinking. Can I just have another question then on Sinch? Can you talk a little bit about how that is progressing? You have come up in revenue terms a little bit. This revenue seems to be flat quarter-over-quarter. You have some good experience from that when you have discussions with your clients. How should we expect that to progress? What is it that you see here next in terms of this, let's say, one year out? It would be interesting to hear.
Yeah. 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, of course, also reach new customers. 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. As you pointed out, some of those revenues have not yet materialized from those discussions. 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. Thank you.
As a further reminder, if you'd like to ask a question, please press star one on your telephone keypad. That's star one for a question. It would appear we have no further questions over the phone at this time.
All right. Thank you. With this, we will end the call for this interim report for today. Thank you all.