M&A Announcement

Sep 25, 2019

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Cinch Investor Update. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that the conference is being recorded today, Thursday, 26th September, 2019. I would now like to hand the conference over to your speaker today, Thomas Heath. Please go ahead. Thank you, operator, and good morning, and welcome, everyone, to this investor update with Cinch. We're very glad to announce I'll be around for any questions. But right now, I want to hand the word over to our CEO, Oskar Baader. Oskar? Thanks a lot, Thomas. So yes, we are super happy to today announce the acquisition of MyElephant. It's a French mobile engagement company, which complements us very well and will help us on our journey going forward. So can I have the next slide please? So this is now showing just an overview of what Cinch is. So we're a SEK 4,400,000,000 company doing a SEK 400,000,000 adjusted EBITDA plus over the last 12 months. We're running a customer engagement through mobile technology, basically using mobile technology to engage customers and or to help enterprises engage their customers in all in various forms. And it can be text messaging, it can be voice and video and it can be advanced messaging formats such as personalized video. And as you know, if you listened into our calls for a couple of hours, we are doing this all the way from the headrest around the corner up to the largest companies. We're serving 8 out of 10 of the largest U. S. Tech companies. And we're now going to talk about how this acquisition helps us in this journey going forward. So can I have the next slide, please? As we have described before, there's a technology evolution in the messaging markets, and we're basically going from straightforward text notifications where we're sending out a text string, can they don't be late for a doctor's appointment or here is your boarding pass or your flight is canceled or it's a bank statement or something like that. I think you have all experienced those type of messages. It's a $17,000,000,000 mark globally, and we are the global leader in that market. And that market is now going through a very fundamental and to us exciting change, that is it's moving from straight text messaging to what we call rich media messaging. So that is you're able to send voice or send video or pictures via new formats of messaging. And the next stage is going into what we call conversational messaging, which is not only can you add more richer media in the message, but you can also start a conversation with your brand. And so you can respond to the message sent out and you can have you reach a chatbot with the brand and you can have a start to have a conversation with the brand and then starting to and if the chatbot cannot answer, you can be handed over to the customer care operator at the brand. We believe that this journey, obviously, being able to both have a conversation with the brand and having voice and video in the messages will increase the value of the services to consumers and increase the value to enterprises and will therefore drive a strong growth in our market for the years to come. The acquisition of Myelephant plays very nicely into us taking a good position in this newer and larger and faster growing market. So can I have the next slide please? We have identified where the CPaaS or communication platform as a service, where that is relevant through the customer journey, and it's relevant in a couple of areas. The first one is revenue generation, that is people doing various forms of communication to their customers in order to increase revenue that may be reducing churn or impacting other former metrics. It is also used to for service enablement, which is maybe it's a one time task for when you signed up for one of these big one that when an Internet service, you have gotten I'm sure a lot of you have gotten a password sends via text message. So that's an example of the service enablement category. And the other category, which is growing very fast right now, is to use mobile technology to handle customer care, basically having a chat with your customers via mobile messaging formats. And that's another area which is going very fast right now. And can I have the next slide, please? We are, as we've communicated before, there is very strong growth in our markets, and the growth is in 2 categories. The basic category is where we play in our very large is the connectivity layer, And that is basically making sure the message is delivered to customers. We are making sure the voice call is terminated to a customer so the enterprise can reach the consumer. But that is, in its simplest form, just, if you will, making the call or making the video call or delivering the message. And there you differentiate between Ignis' superior quality, scale and reach, and that's the most basic form of our markets. Then our market is now experiencing various and that market is growing like I said, the size of that possession market is $1,700,000,000 and it's growing at the rate of, say, 10%, 15% per year. And then we have on top of that, we have a faster growing market, which is a software as a service or SaaS market, where you add more software and more services and on top of the connectivity in order to provide a better service to the brand. It may be an advanced functionality up in the web, so somebody can create a rich media message or it may be other forms of software up in the cloud that makes it easier for the enterprises to consume these type of services. And that market is growing very fast. There you probably have a growth rate of around about 50% per year. And as the market moves into rich media messaging, this layer is much more needed because it's more complex for an enterprise to create a video or a picture message than just sending a text string. And it is more complex for an enterprise to have a conversation with a consumer than it to send off a one off notification. And therefore, they need more software for companies like us. Typically, you can charge one charge for the connectivity as such that is delivering the message, and you can charge an additional SaaS fee for the software as a service. And that is exactly what this acquisition is targeting. All right. Can we have the next slide, please? And with that, I would like to leave hand over to Roshan, who will speak about the rationale of this acquisition. Thank you, Oscar. Good morning to everyone on the call. This is Roshan Saldrana, CFO, and I'm very excited to be here as we present our first acquisition in 2019. And before I do that, I'll talk a little bit about the overall M and A strategy for Cinch. Can I have the next slide please, leveraging M and A to meet strategic objectives? So we look for acquisitions and mergers in primarily 2 within 2 strategic domains, the first one being to augment our technological platform and our go to market capabilities and the second, to add scale and, of course, profitability over time. Within technology and go to market, we're looking for a complementary technology that fits our strategic product road map in all of the areas, text notifications, rich media messaging and conversational messaging. Our go to marketability needs to be augmented in relevant products and geographies. We are we have strong presence in key markets in Europe and in the U. S, but we'll need to add that and we'll also need to add capabilities in terms of being able to sell more to enterprise customers. We also look to add increased software value add, and this is increasing the SaaS component of our revenues and our margins, which then leads to higher gross margins overall for the company. And of course, creating future growth drivers to meet our growth targets for the company. As you know, we have a growth target to increase adjusted EBITDA per share with 20% over time. And then on the scale and profitability, we want to increase and acquire sticky customer relationships. A key component in our business is, of course, the direct operator connections. Cinch has a strong platform of operator connections globally, but we want to keep adding to that in new markets. And this, of course, enables us to acquire more traffic from our customers, especially from our larger global customers into those markets, again, driving growth and profitability. We also want to extract synergies, of course. We have a very scalable central platform that currently is delivering more than 30,000,000,000 engagements, and we believe that, that can be scaled further and we can extract synergies by transferring traffic to Cinj's technology platform. At the same time, we look upon acquisitions, especially in the scale and profitability area, as needing to be EBITDA accretive and therefore acquiring profit at the valuation below our own. Can I have the next slide please? Strategic acquisitions. CLX, of course, was founded in Stockholm in 2008, rebranded to Cinch in 2019. And during this time, we have made a number of acquisitions, and we've tried to show on this slide that these acquisitions have been done both in the technology and go to market space as well as in the scale and profitability space right from the beginning when Simsoft was acquired in 2009, being a technology acquisition, until the Unwire acquisition, last year, which was a scale acquisition. And now we are adding MyElephant, which brings us unique rich messaging capabilities and low code tools. Can I have the next slide please, deal rationale? Coming to the deal rationale for this transaction, for this acquisition, we're acquiring MyElephant, a company founded in France in 2010 with a cloud based software platform for mobile engagement. It is a pioneer in the use of mobile landing pages, but also in delivering advanced real time analytics to its customers that enables them to configure how they communicate with their end customers. The acquisition brings with it a team of 41 people that is based in Paris and Bordeaux. Our real rationale is, of course, this is a technology and go to market type acquisition to strengthen our product offering and fuel future growth. And the future growth will be both in the form of extensive cross and upsell opportunities for our existing global customers, customer spread globally, but also in terms of being the attractive door opener to new customers in all of our markets. In addition to that, we are increasing SaaS value add in our revenue base as we will be able to leverage Jungle's platform in our existing customer base. We'll be step changing customer experience for both businesses and their customers. The integration of MyElephant is expected to be done during the next 12 months to 18 months with the migration of MyElephant SMS traffic to Cinch direct operator connections, a full virtualization of runtime platforms and of course, technical and operational readiness to expand the platform beyond France to key markets in Europe and in the U. S. We expect that a team of around 10 persons will be working with this integration during that period and delivering the integration. As an introduction to the financials, Cinch is paying an upfront enterprise value of €18,500,000,000 with the performance based earn out up to €3,000,000 in the next 2 years, 2020 2021. The transaction expected to close is in early October. My Elephant recorded revenues last year of €10,500,000 with a gross profit of €3,000,000 and an EBITDA of just under €1,000,000 in 2018. We expect that in the short term, profitability will be or the cash flow will be neutral to Cinch. Revenue growth last year was 25% in 2018 compared to 2017. With that summary of the deal rationale, I would like to hand back over to Oscar to walk us more through the strengths of the My Elefant platform. Thank you, Arsen. Can I have the next slide, please? So Myelephant is a low code mobile engagement platform with strong real time analytics services. I'm seeing I'm waiting for yes, there we go. I see it on the webcast as well. And so what you're able to do is you'll be able to go into the web page and you'll be able to create a message in a good web UI. So this is the additional SaaS services that we're getting. So you're able to create the message through a nice and easy to use web interface and then send the message. So brands can go in and brand managers can go into this web interface and create a message. And then you can send it via various channels. It may be SMS. It is WhatsApp. It is pretty large on Facebook Messenger. So it also, apart from taking us into the SaaS service, our ability to create these type of messages and handle them on a SaaS web event interface, You are they are relatively large in new channels such as WhatsApp and Facebook Messenger. So using new channels to communicate those messages out. And then you get a strong analytic software so you can so brand managers can optimize their campaigns or see the metrics of their campaigns in an easy to use web interface as well. So that's the service that an enterprise will experience. So and the added software is in the web interfaces and the added software on the SaaS side and then strong on the various new channels. Myelephant is also integrated in various forms of marketing tools, so CRM tools integrated into Adobe Campaign and Salesforce Marketing Cloud and Celgents and Microsoft Dynamics, etcetera. So in those, you have a drag and drop interface if you're an Adobe user, if an enterprise is an Adobe user, you have a drag and drop interface. So basically, right, you create your flow in the Adobe tool, but then you want to do this messaging campaign where you then drag in MyElevance web interface and have dragged in their logo into your web interface and have dragged in their logo into your flow, the visual flow builder in Adobe, then the messages will be sent via My Elefence platform. So it's very nice integration to the larger marketing to the larger marketing clouds basically. So can I have the next slide, please? So this is now playing on the left hand side of this slide. I'm just waiting for the webcast to update. So this is now playing on the new channels. And so text messaging being the largest channels, but then a lot of other channels coming in with the new types of technology. And that is exactly what this acquisition is playing in. So it's moving us in text messaging to richer formats of text messaging but then into new channels. And the message out of this platform can look as on the left. It is no longer a text string. It is an interactive multimedia message basically where you can have pictures, you can have logos, you can have various forms of carousels and action buttons, etcetera, which obviously makes the price and the end user a lot more valuable. And can I have the next slide, please? 2 very, very effective forms of communication. The reason that this market has grown so big is you have 9% to 8% we can reach everyone in the world. And some one second, you have a 9% to 8% open rate and 95 percent read rate within 3 minutes. So this very powerful form of reaching users and is very effective when delivering notifications or updates or something like that, like don't be late for a doctor's appointment. Super powerful since it gets directly to the pocket or to an area where the user is at all times and it is very, very fast. But that form of text message typically have an interaction time of 3 seconds or 5 seconds or something like that because it is like that. It is a very short, very targeted 160 character message. What's happening with MyElephant, they have created a technology to in this text message, you basically embed a link. So in the message, you see a link. And when you click on that link, on Android phones, especially that link does not look like a link. It looks like a picture. So it's very nice user interface in the text message. So you click on the link and you click on the picture and then you get into what we call rich text messaging, rich messaging here. You get into a mobile landing page, and that mobile landing page may look as in the center of the screen here. So there you have pictures, you may have videos, you may have action buttons, you may have carousels, you can have call to actions and links to your own web shop, etcetera. And needless to say, that is a much richer experience to the brand, and they can do a lot more in that type of format than they can do in a text notification. And you can see that the average interaction there on MyElephant Services is moving from 3 seconds to 45 seconds. So it's a 15x larger and more interactive type of service than the simplest form of text messaging. And what MyElephant software is doing very elegantly is giving the brands the ability to in a web based web based self serve to create this type of mobile landing page. So that is the first move. So increasing the interaction time with 15x, but then also giving the brands other forms of services to be able to connect this to the mobile commerce or to sell stuff or to do a poll or to do all forms of things in this mobile island page. And the next form is what we call about we call conversation messaging. So Jungle or My Elephant is also doing giving the ability to, via various channels, respond to this message and then having a chat conversation with the brand when or with the the consumer when the consumer responds to the brand. And they're doing so via various channels like WhatsApp or Facebook Messenger or RCS. And what happens then is suddenly that in addition to the value of being able to have rich media messages and a carousel or selectable buttons, you can also have a conversation with the band. And you see that the average attention span of a user then moves from 45 seconds to 120 seconds because the user is actually starting to have a conversation with the brand. So that is a 40 it's a 40x higher or more intense or longer interaction with the end user to the brand than a simple form of text message. And needless to say, that is very powerful when you want to engage users to first be able to do this rich media and then also have conversation with the brand. And therefore, it's higher value to the end user, higher value to the enterprise, and you can then charge more as well. And this is then driving the growth of the market and therefore also our own future growth. So can I have the next slide, please? We're going to look a little bit on how that looks. So the pricing here becomes a clear sauce pricing. So in the straight text messaging space, you would have the charging model or pricing model, it's clear. That you send the text message and we charge we pay the operator a fee and we have an uplift for our own services. And it's a pure transaction based service. So for every transaction, you get a fee per transaction, which is basically an uplift of the operator fee for the software and services that we do. What happens in the middle model where you would send a link to a landing page, you would to a mobile landing page, you have what we are doing, we have added software to create this landing page with adding an additional software to the brand. So we are getting if you see at the bottom there, routing fee for sending the text message. You're still getting that, but you're getting an additional software as a service fee for the software that makes it possible for the brand to create this mobile landing page. So it's an additional or an increase in margins to us on top of the messaging fee. Like we have explained in many different sales calls in our main business as well, but this is just adding to those capabilities since we're providing more and more software. On the conversational side, it is a similar model. So if so in the most basic form, sending message is one thing, creating the mobile landing page or creating the rich media contact is one thing. And then if the brand also want to be able to have a conversation with the brand, it's an additional fee. So you charge basically in the SaaS in the typical SaaS way, you charge an additional fee for additional software that the brand wants to use. And as we can see, this then drives a significant higher margin per transaction because it also gives a richer experience to the brand for a transaction. So the value to the brand is much higher. And adding these type of services over time is a core strategy and this plays into that strategy because it will increase our value add and our ability to charge for each transaction that we deliver. And so can I have the next slide please? And with that, I would like to leave over to Roshan to explain how this plays in our financial targets. Thank you again, Oscar. Just a very brief comment on our financial targets. As we have said before, our financial targets are debt adjusted EBITDA per share. We aim to grow that 20% per year, and we aim to keep net debt over EBITDA over adjusted EBITDA below 2.5 times over time. The transaction impact of the acquisition of MyElescent when closed increases net debt over adjusted EBITDA by around 0.4x, taking us to a pro form a net debt over adjusted EBITDA of around 1.4x following the acquisition. With that said, I would like to hand back over to Oskar for concluding remarks. Thank you, Raffin. So what we're doing here is basically I think you have understood, we're moving to from this is staying very nicely in the move from text messaging into more advanced forms of messaging, more richer media and conversational. And when we're doing that, we're adding more value add in the software and in the SaaS world to the enterprises. And therefore, we can charge a higher margin per transaction, which we think is very attractive. And it is also so that so that's very much what we're doing here is moving out taking a step up the value chain and therefore and adding more services and being able to charge more for transactions. We also see in this transaction a strong product company, but that is focused on one region or one country. It is pretty much the majority of the revenue is in France. And we see, obviously, as a global company, we see a very strong ability to take this company or to take this strong product and sell it to all our own regions. So we see a strong ability to upsell and cross sell the products into new regions. You can compare this to the acquisition we did over vehicle, over personalized video in Seattle. So we saw this strong and market leading technology in personalized video being in the U. S. We acquired it. We continued the growth in the U. S. And then we also took it international market in a very effective way. And we could see that the growth on vehicle post pack acquisition has been between 50% 100% per year and still a key profitability. And this is something we plan to do on this acquisition as well. So Myelephant, from their perspective, realized in order to go international in a big way, they needed a vehicle to do so. And we have the muscles and we have the staff in place to do that. So we're basically taking the product and then expanding internationally. And we can do that by our own existing sales force. And since we're selling similar services, our existing sales force get an additional food to sell. So we see the financial impact to us will be both gradually increasing margin when we're adding soft SaaS services on top of value added SaaS services on top of the method transmission. But we're also seeing an ability to upsell in all our own markets and bringing this company international. So we see a growth impact to ourselves since we have more tools in our toolbox to sell. And when you buy these type of market leading companies in one region and going and bringing them international, we think it's a strong growth opportunity for us. So that said, we're super excited about making the deal. We think it fits our strategic agenda very, very nicely. It's a pure it's a go to market and technology play, which the communicator would want to do. By doing this, we're strengthening our product offering and therefore making a strong impact in the actual international market. So very happy to have made this transition. It's a very strong team in France, and we're looking forward to driving growth together in the coming years. That said, I will leave it to Thomas to ask for any questions. Thank you. And if there are any questions on the call, please let the operator know. We've not had any questions come through at the moment. Please continue. Thank you very much. With that in mind, this concludes this investor update with Cinch announcing the acquisition of MyElescent. Very glad to have you all listen in and don't hesitate to reach out if you have any further questions or comments. Thanks. Thank you. Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.