M&A Announcement

Oct 10, 2019

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Investor Update Conference Call. I must advise you that this conference is being recorded today, Thursday, 10th October, 2019. I would now like to hand the conference over to your speaker today, Thomas His. Please go ahead. Thank you, operator. Warmly welcome, everyone, to this investor update with Cinch, where we present the acquisition of TWW in Brazil. My name is Thomas Heath. I'm Chief Strategy Officer and Head of Investor Relations. With me in the room today is our CFO, Roshan Saldanha and our CEO, Oskar Wainen. With those introductory remarks, I'll hand the word over to Oskar. Thank you. So we are very happy to announce today the acquisition of PWW, one of the leading messaging providers in Brazil. And Brazil being the world's 5th largest country by population and GDP, it's a very interesting market for us. So with that said, let's move on to Slide 2. So here we see a summary that we have showed a couple of lines on Cinch. And to orient this acquisition a little bit, you can see in the top right hand corner, 30 plus offices. We're significantly strengthening our presence in Brazil here. On the SEK 30,000,000,000 engagements, we're adding around about 10%, a little bit more than 10% of a number of transactions. So SEK 30,000,000,000 transactions goes up with around about 10%. And one line below serving 8.0 out of 10 of the largest U. S. Tech companies, Brazil is a very interesting market to our biggest customers. So we're strengthening our offering to our biggest customers. And on the next line, a growing global multibillion dollar SIPAS market. Brazil Brazilian market has grown fast and at a rapid pace. And we're adding some 3,000 enterprises as customers via this transaction. So we think that's a very interesting addition to our current strong customer wins. And on the last slide, profitable since our foundation in 2,008. This adds to our profit in a significant and accretive way. And also the gross profit growth, it is a way it's a good way for us to continue to grow in a profitable and accretive manner. So this is in line with our current and future strategy. So next slide, please. So Slide 3. So here we have the where the CCaaS market is relevant. It's relevant in the revenue generation side, in the service enablement side and the customer care side. So revenue generation, it's a broad category of customers or enterprise is using messaging to add revenues or reduce churn or other forms of revenue generation measures. It's also service enablement that can be one time passwords, verification, under masking, mobile boarding process, etcetera. I'm sure that all of you have received or used messaging services for that type of use cases. It's also becoming very large in customer care, where people are or enterprises are moving their call center or customer care volumes from call centers over to messaging since it is more effective for the user. It's a preferred channel for the user, and it's also easier to automate. And therefore, you can significantly lower cost. And this transaction is playing in all of those different categories. Next slide, please. So on a growth, we put up our own playbook from our own perspective on profitable growth. We're looking at the market from a 10,000 or maybe 100,000 feet perspective and see we are on the connectivity layer. That is what Sensh has been doing traditionally, and that is connecting operators and other forms of and other communication channels and of providing those via one single API to the Wells Enterprises. And it's the additional software value added services in the software as a service layers where we are empowering businesses to leverage rich and and conversational investing by adding increasing our software value add and then being able to charge more per transaction. This acquisition is primarily targeting the connectivity layer. We get a strong connectivity layer in one of the world's largest countries, Brazil. So it's strengthening our offering in that layer as a contract to the Mailafant acquisition, which was primarily targeting adding software as a service components to be able to charge more per transaction. So this is a very good transaction in the connectivity layer with high profits and strengthening our offering to our big customers in that layer. Next slide, please. We are leveraging M and A to meet our strategic objectives. We have looking at our market, we have a very attractive market. The messaging market alone is $17,000,000,000 and it's a highly fragmented market and it's a highly profitable market as well. So we're using both organic growth and M and A to meet the strategic objectives that we have. This is on the scale and profitability side or the connectivity side. So on the key rationale for this is mainly on the bottom part of this. So acquiring the key customer relations, which is run by 3,000 enterprise relations in Brazil. We're adding direct operator connections in new markets. So we're adding all the connections, all the operator connections in Brazil to similar platforms. And then we have the enterprise value is EBITDA accretive. So acquiring profit at a lower valuation than we have is obviously attractive. And that's one of the striking things within this market. There's a lot of companies out there making very good profits, but that doesn't have the robust gain and the outlook that we have, and therefore, they have a lower valuation. We're also using so that's the kind of the yellow scale and profitability part. That's the main rationale for this transaction. And as you know, as we communicated in the Biolephant case, we're also using M and A for the technology and go to market objective, but that's not the primary reason for this acquisition. Next slide, please. Let's move on to Slide 6. This is the acquisitions we have made in the past year. So you see that the quality go to market, we made a set of acquisitions there where Veek and MyElephant being the last ones. And on the scale and profitability side, we've made a set of acquisition there as well where Amwire a couple of it was quite some quarters ago and then TWW in Brazil fits into that category as well. So we're continuing on the strategy we have set out. And when we find good acquisitions, we are making them since we think they're very good for our shareholders. Next slide, please. And with that, I would like to hand over to Roshan. Thank you, Oskar. Just briefly describing the rationale for this transaction that we're doing in Brazil. Very excited about acquiring CWW. CWW was founded 23 years ago, exactly today. So that's an interesting bit of information as well. It's today the 3rd largest SMS connectivity provider in Brazil, bringing with it a team of 37 people and 3,000 large enterprise customers across all industries. This is, of course, as Oscar said, a scale and profitability type of acquisition for us. So we will add scale, we will add local operator connections, and we will add strong customer relationships. TWW is a profitable company, generating an EBITDA in 2018, adjusted EBITDA of BRL17.5 million or SEK43 1,000,000. Our enterprise value in this transaction or the enterprise value of TWW in this transaction is BRL 180.75 which at today's exchange rate converts to SEK439,000,000. We are expecting to close this transaction in the second half of October twenty nineteen. From an integration perspective, we will utilize TWW's direct operator connections to terminate Cinch's global messaging traffic. We will also be over time integrating our global messaging platform with that of TWW. And of course, we will be sharing our ways of working and best practices across both companies, bringing Synch's products to DWW's customers wherever possible. And with that, I would like to hand back over to Oscar. Sorry, I was on mute. Let's move on to the next slide, Slide 8, please. So the size of Brazil and the Brazilian market and the growth of this is one of the main reasons. Brazil being the world's 5th largest populous country by population, GDP and geographical size. It's got a 210,000,000 population, and it's got a rapid increase in smartphone penetration and mobile Internet usage. So we're seeing both a large market, and we're seeing strong growth in the market now and going forward. And we're seeing given that we're serving the world's service enterprises, this type of large growing market is obviously very interesting to our largest customers. And TWW, as such, has got 3,000 customers, net 19% customer approval. So strong quality provider, which we like. 3,400,000,000 messages sent in 2018, so a little bit more than 10% of our and then 10% of our volume. And as you know, it's been a CIMS partner since 2012. So we have used PWW as a delivery partner in Brazil for several years. So we know this company, and we know their quality very well. So this is a known entity to us, both in terms of personnel and processes and quality of operations. Thank you. And then let's move on to the next slide. We have seen a rising interest for Brazil over the last 2 years from our global customers. So we've seen a 10x increase in our own traffic to Brazil, which has been obviously a key reason for our own increased interest in the market. So since July 2018 to June 2019, we've seen our own traffic increase by a factor of 10. And given that Brazil is now becoming a large market, the acquisition of TWW secures the highest possible quality through double action and productivity. It's a known fact in our market that when traffic is high for demanding customers, you want to own the entire chain from the customer all the way down to the operator in order to control and improve quality gradually. It is hard when you have a middleman in between when you're depending on on some other country. And given that we see the traffic in this region being big and we see it growing, we think it's a very good move in order to integrate that into our global platform. 1. Next slide, please, slide 10. So this is adding to our Tier 1 global connectivity network. We have 300 direct mobile operator connections, and PWW adds direct connections to mobile operators in Brazil. This is kind of the base of our offering. And it's something that is very expensive for other people to build. It takes a long time and then times operators don't allow you in. So adding direct operator connectivity in the market is a core asset for us and that's a core reason for this deal. And as I mentioned before, it gives you end to end control of all massaging. You can increase the quality. We have enhanced security, and we can have security all across the network. And speed and throughput enabled to deliver high speed and high throughput to our customers, improved redundancy to control the entire redundancy chain and make sure that nothing is going down because we control the entire chain And then broader feature support, basically not having to deal with the getting a square peg in a round hole problem when you control the entire network from credit to credit, it's much easier to give total feature support. And on this slide, you also see the operators that we're adding. Next slide, I will hand over to Rosh Schren again to cover Slide 8 financial Slide 11 financial targets. Thank you, Oskar. Again, just to remind us, Sintra's financial targets continue to remain and are unchanged from before. Adjusted EBITDA per share to grow 20% per year and net debt over EBITDA to be over time less than 2.5x. This transaction impacts net debt by over adjusted EBITDA by around 0.8 and pro form a net debt over adjusted EBITDA will be 2.2x following the acquisitions of both Myodefent and TWW. With that, I would like to hand back over to Oskar for concluding remarks. So thank you. That was all the information we wanted to provide today. To me, the rationale is very simple. It's a very solid company that we've known for a long time in a very large market. We have a large bond for our biggest customers. In addition to that, it also adds to our core one of our core assets, the operating network. So this is a bread and butter, very solid acquisition from our side, and we're very excited to work together with the CWW team going forward. Thank you. And with that, I will hand over back to Thomas. Thank you very much, Oscar. And with that, we'll open up for any questions from the conference call. Operator, please? Thank you. Ladies and gentlemen, we will now begin the question and answer session. And the first question comes from the line of Daniel Durburg. Please go ahead. Thank you very much and congratulations on an interesting acquisition. First question would be to Rojan regarding the integration and I guess that you will migrate TWW to your own Nova platform? And can you tell us about how much cost this will be if it's nonrecurring and if it will be how it will pan out? That's my first question. Yes, sure. We will be migrating the traffic over to our own platform over time and do that in a smooth way while at the same time maintaining customer experience for the customers of TWW. We estimate the total integration costs to amount to around SEK 13,000,000 SEK 13,000,000 over the next 18 months or so. Perfect. And another question for me. If you look at this market, you obviously have been working with TWW since 2012. And if you should have done more organic, I. E, done these connections with operators yourselves and then start to build an organic presence, can you talk a little bit about the why you choose to do this instead of that strategy? Moskko, do you want to take that? Yes, I can take that question. Given that the messaging market is mature, it is very hard to go into these markets organically from scratch. And that's due to a couple of factors. One, it's hard to get the actual operating connections from a commercial perspective. They don't let a lot of players in. Number 2, there are volume discounts from the operators. So basically, if you start from scratch, you would not be making any margin or even subsidizing traffic in order to get the revenue since the big customers would be at the higher volume tier than you're able to do. So if we made the operations right now, we couldn't sell to our business customers from day 1. Number 3 is a time, quite time and resource question. It would take a long time both to build the connectivity, build the local team and to build the volume. So from an ROI perspective, it could take a long time. You have a stretched out period where you're making losses instead of a short period when you obviously pay money for it, but then you get a good impact right away. Yes. And also the AP Connect sorry. Yes. And the last question is we have, like you said, our own traffic to this market has 10x over the last months. We have a need now to do it. We have a large demand from our biggest customers to do it now. So we actually don't have time to go and build it since then we would, I wouldn't say risk them, but it's a key thing that your biggest customers want. They want it now, then it's hard to wait for a couple of years to deliver it to them. Yes. Great answer. May I just ask you, out of these 18 connections or operators that you showed on this slide, how would you say are most of them closed? Or is it possible for someone else to do this to add these connections? I think I'll take a shot at answering that. It's a little bit of a mixed picture. I mean, the general answer is that there are clear barriers to entry on the operator side in Brazil. We've had a very limited amount of direct connectivity, which has definitely not been sufficient. So it's a little varied across the carriers, but this is a clear barrier to entry. Perfect. I will get back in line and let someone else Yes. And just to comment on that, it's not always a clear black and white. It's written in the document, this is open or this is closed. It's a relationship gain, etcetera. It's not a clear cut answer, but in practice, it's hard to get in, if you will. I understand. Thank you so much. There are no more questions at this time. Please continue. If there are no more questions, we thank all the participants for dialing to today's conference call. We're very excited about the future and hope you keep up with us in upcoming announcements. Thank you very much. That does conclude our conference for today. Thank you for participating. You may all disconnect.