Earnings Call: Q1 2017

May 19, 2017

Thank you, and welcome to this earnings call for Q1 2017. In the room with me today is Odd Bollin, our CFO. So jumping into the summary of the Q1 results. Next slide please. Revenue increased by 133 percent to SEK 622,000,000. Organic growth was 20%. Gross profit increased to SEK 191 1,000,000, with a margin of close to 31%. Adjusted EBITDA amounted to SEK 80,900,000 here and EBITDA margin to 13%. Next slide. From the foundation of the company, we are combined fast organic growth and profitability. In more recent years, we have used our position as a listed business to complement organic growth with acquisitions. This has helped us to reach scale and scale matters in our business. Since the IPO, in 2015, we said 4 things. 1 was strengthen our position in the A2P messaging market. We have done so through acquisitions, but also through continued organic growth. We also said that we were going to develop a full service offering for enterprises. So we added voice video and an IoT service offering to our service portfolio to enterprises. We also expanded our geographical footprint We're now one of the largest vendors in North America. We established presence in large presence in Germany, and also through the most recent acquisition now have a strong foothold in Asia. And we also said that we were going to use our position as a listed business to start consolidate and make acquisitions. And we've done 4 acquisitions since the IPO. Next slide. This shows the progress in numbers since the IPO. Almost more than tripled our top line revenues, more than tripled our market cap, more than quadruple number of transactions in our network, but only doubled number of people in the organization. So we can prove scalability. And we're not yet at full scale. And this combining acquisitions with organic growth of 28%. Next slide. We'll walk you through some updates on the acquisitions. The integration of M Blocks has gone beyond our expectations. We received menu enterprise customers and 10,000 of developers and small medium sized customers. Large presence in the North American markets. And we are pleased to report that cost synergies were higher and delivered sooner than anticipated. A quick Cinch update. We launched video service, video communication service in May with Cinch. And we have seen a good early uptake, especially in Asia Pacific. Dixura acquisition and the integration of it proceeds according to plan. It was an acquisition we made in February. And added approximately 1000000. Next slide? So the most recent acquisition of Dialog adds a lot of presence in Asia Pacific. It also builds out our Tier 1 super network, with also with focus in Asia Pacific. As part of the acquisition, we got a service offering called Sentinel that is a security solution for mobile operators. That helps us to strengthen the relationships with mobile operators to create value for the Enterprise Division. The net synergies of the acquisition is estimated to 1,000,000 and expected to come in 12 to 18 months. Next slide. So next generation messaging also called RCF, Swish Communication Suite. It's now being developed by the GSMA and Google is one of the main drivers in this ecosystem. We are part of the Google Early Access Program, and we think that RCS will help will drive a lot of more messaging traffic in the networks and grow our market size. In the presentation, you can see the environment and the user experience, how that changes from an SMS to an RCS environment. This will enable a lot of more enterprises to launch services, but also to address more use cases. Next slide. We are continuing to invest in our IoT solution, It will take time until IoT is visible in our revenues So going forward in our growth strategy and we're sticking to our long term strategy on profitable growth, continued organic growth. We're continuing to expand our geographical footprint. We now have additional services and we are at actively upselling our customer base with those. We are looking at new product offerings and service offering to continue to upsell our customer base. And also continue looking at selective acquisitions to continue to grow the business. Next slide. Our strong development secures continued profitable growth and to be aggressive in the marketplace. Q4 typically is our strongest quarter. Q1 is typically a little bit weaker. With the acquisitions of Dialog, we strengthened our footprint in Asia Pacific, a rapidly growing market. Further, we are excited about the future prospects of RCS and that will help to grow our market size, especially in the messaging market. And we continue to invest in IoT, but as I concluded earlier, it will take time until we will see uptake in that market for us. And with that I'm handing over Please ensure the mute function on your telephone is switched off you. We will now take our first question from Daniel Dodgeberg from Handelsbanken. Please go ahead. We can start with the new financial targets, the reason why you changed towards growth in adjusted EBITDA rather than top line and EBIT margin, is it because of your M and A driven focus or? Yes, of course. The fact that we are doing the acquisitions gives us a lot of goodwill and immaterial assets that we need to write down. And then EBITDA is is a better measure than EBIT. We also decided to combine the growth and profitability targets into one target. While doing this as a change. So from a cash flow perspective, it's more or less the same because you. Another question is on the you're right about the temporary slowing organic growth in enterprise can you tell us why it's temporary or is it or you're cleaning some lower margin contract or something of? There were a few different reasons. 1, as Johan mentioned, is a seasonal slowdown. Generally speaking, you could say that, obviously, we traffic the traffic we send is, has a connection to the number of days in the period. So in a quarter with fewer days, we have less traffic, in that quarter. We also have a situation where, generally speaking, on a holiday traffic is give or take about 50% of the traffic on a weekday, meaning that more holidays also impact our our revenues every quarter. So quarter 1 tends to be slightly weaker, and we had fewer days. We also had a temporary slowdown from 1 of our resellers where we, for different reasons, has a little bit less traffic during the first quarter, but where we see that traffic coming back at the end of this quarter. So that was a temporary effect. Then as we have mentioned in the report, one of our customers have, made an acquisition of, a platform for messaging so that you know how the how their own messaging platform that they use, which means that they have redirected some of the traffic that we have been sending for them over to their own new platform. Okay. And you talk a little about the vision to take out further costs? Is there possibility to give some quantification of the level there? And also if you could talk about Sura margin of 2.5 percent in the quarter, is that seasonally or normal in terms of seasonality or it below expectation or in line with expectations? Talking about the cost levels in January, speaking, we do think we have more more to gain, from the Amdocs acquisition we did last year. We still have some some potential for cost reductions there. We obviously have quite a bit of potential for cost reductions in both the Siron dialogue as communicated Sura's margin for the quarter, Can you please specify exactly what you referred to? I think it was, okay, it was including integration costs. Sorry, didn't see the, so it's a bit higher underlying. So sorry for that. Okay. And just my final question, if I may, if regarding the Finch and the new product, the video launch in in May. Can you just describe for us the revenue model that you use for the external customers and we do side? Yes. That is a licensed model where it's number of users that is using DVD solution. Okay. Thanks. We will now take our next question from Alina Osterberg from Carnegie. Please go ahead. Yeah, good morning. I just wanted some more clarification on the top line slowdown, which you say is part temporary. If you could maybe break down a little bit, how much is related to what? And also, I mean, twilio buying beeps and and moving traffic over to to that platform how much of that traffic that you expect to be migrating has already migrated in the quarter should we expect further migration in Q2, or do you think that that effect is is fully into to this quarter. So how much relates to to Twilio's move of traffic and how much relates to your customer temporarily holding back traffic in in Europe. First of all, the we have not communicated which customer we have seen doing an acquisition, whether it's Twilio or not is your gifts, so we can't comment on that one. Generally speaking, we think that The majority of the slowdown, the temporary slowdown we saw in this quarter will come back, during the end of this quarter or beginning of next quarter. And I think it's worth to comment as well that Q4 is typically our strongest quarter and Q1 a little bit weaker. So it's a comparison effect as well. Could you say how much of the traffic has been migrated that you back to Margaret or if there is a further effect in Q2 to be expected? No. We haven't commented on that. But I think it's a relevant thing to comment on. That could be then. We'll consider that, but not going to comment on it right now. There are no further questions from the telephone. We have a class Jones from Frederick Lithell from Danske Bank. Please go ahead. Yes, good morning. I was wondering if you could just state a little bit on the acquisitions you've made, the Sura and the Cinch, how much more of sort of integration and the EU charges, we should expect that you still have to use in the coming quarters. I mean, you used the in combination $10,000,000 in this quarter and how much is less than what of the acquisition does it relate to? It would be good to have sort of, something to hold on to there. Thank you. Well, it's what we see going forward or less than what we've seen so far, but we will have some costs over the next couple of quarters. As we do gradual adjustments and continuing adjustments of the organization. But the amount that we foresee or such that We haven't seen, a need to quantify them. And communicate them specifically because we don't believe them to be very large. Okay. Does this mean that the initial take when you did acquisitions and the probable sort of the charges you foresee at that point are they do you see that they will be smaller altogether than what you felt in the beginning? For the initial force to, you know, to say What we do what we do generally, we we, make an accrual for the, for the restructuring costs that we expect over the over the time of the restructuring period. So, then there are always some adjustments that might have to be made over the course of the restructuring, but they should be rather small. Okay. Thank you. Can I have a follow-up question? You know, I mean, you do this blocks acquisition and you do the, you get into the German market and also do the dialogue. What are the implications and what have you felt that operators? Because I mean, you have this kind of steady negotiation with operators on termination fees and all that stuff. Is there any insights so far? I understand it's early out, but any insight that you, your sort of negotiation power has improved over time due to you being such a big consolidating factor in the whole market? Yes. I mean, scale definitely matters in our business and we continuously speaking to the mobile operators on these topics. And I would say course, with more transactions, we have more negotiation power with mobile operators. But is it fair to assume that even though you do have that, you will have to wait until sort of a for operator A, your contract runs out and you renew that one, that's when you might be able to see some improved COGS from a renewed renegotiation. Is that fair? I think it's a very sort of fragmented view of that and it's really a pair operator relationship negotiation. So it's very different, difficult to comment on a general basis for that. There are no further questions from the telephone Okay. So thank you for today's session.