Good morning. Welcome to the Sinch Q1 2023 Earnings Conference Call. All participants will be in the listen only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your touch tone telephone. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Thomas Heath, Chief Strategy Officer and Head of Investor Relations. Please go ahead.
Thank you very much, operator, and good afternoon, everyone. Welcome to this earnings call where we present the Q1 2023 results for Sinch AB. My name is Thomas Heath. I'm Chief Strategy Officer and Head of Investor Relations. With me today, I'm very pleased to say, is our CEO, Laurinda Pang, alongside our CFO, Roshan Saldanha. With these opening remarks, I'll ask the operator to move ahead to slide three for some opening remarks from Laurinda . Laurinda .
Thank you, Thomas. Good afternoon, everyone. It's such a pleasure to be with you today, and as I've been in the role for just under two weeks, Roshan will cover the detail around our results for the quarter, and during the Q&A session, he and Thomas will answer most of your questions. With that said, I thought it was important to share some of my thoughts this morning and to properly introduce myself. You might be wondering why I'm excited to join Sinch, and there are three areas that I evaluated to answer this very question for myself: the industry, the company, and the role. First, the industry. I've spent most of my career working with enterprises around the world, and what I know to be true is that for them to compete and win in their respective markets, they must digitally transform.
I know that's an overused phrase, but the reality is that today's consumers are extremely demanding. You and I, as consumers, have huge expectations. We expect speed and ease. Consumers are not lowering demands. Rather, they will continue to expand and accelerate. For enterprises to compete and win, companies must make their products and experiences easy and fast for us to consume. Cloud companies who enable omni-channel communications are more than simply relevant in this equation.
They will continue to play an important role in the ecosystem of enabling enterprises to meet their business objectives around growth and efficiency. In fact, we can all see the analyst reports who say that some segments will grow impressively in coming years. Of course, given the variations of products within CPaaS, some segments will grow faster than others, and we all know we are facing challenging macroeconomic environments.
Next, I looked at the company itself. We talk about Sinch as a CPaaS player and as a communications cloud for customers. We fit both of those labels, but I also see Sinch as a customer experience company who is well suited to address the needs of the market as I described just a moment ago. Sinch makes it easy for enterprises to maximize opportunities across every phase of their customer's journey. The strategic investments and acquisitions we have made, particularly in the past two years, are both compelling and comprehensive. This is a company that has been profitable since day one, has a set of founders who are visionary yet humble, a board who is engaged and committed, and over 4,000 colleagues around the world who operate with a core set of values around trust, respect, and collaboration.
This collection of talent, culture, and technology portfolio is our competitive advantage. These are the right ingredients for reaching our potential for both organic growth and continued consolidation. Finally, the role itself. The question I ask myself here is, do I fit, and can I have a meaningful impact to help Sinch reach its ambitions? I've answered yes to both of those questions, and here's what you should really know about me. I'm customer obsessed. I'm employee oriented.
I've been leading transformations across large-scaled organizations for many years. I've led commercial and operations teams around the globe. I'm demanding about operational excellence because I believe in the power of operational discipline delivering efficiencies, and more importantly, it enables exceptional experiences for our customers. In summary, my background has prepared me well for the honor of leading Sinch today. Operator, could you please move us to slide 4?
I'm not prepared to unveil a new strategy or commit to new deliverables at this time. In fact, it's really important to know that our strategy and key commitments remain intact, meaning that we continue to focus on cost control, cash flow, and organic growth. However, I am happy to share some of my initial thoughts on how we progress in these important areas and where our opportunities are to create value. For today, I'll highlight two. Integration is highly complex and cannot be considered a monolith. When describing integration programs, I often talk about the need to solve a Rubik's Cube. We need to solve across infrastructure and core IT systems, product platforms, mastering data, harmonizing processes, account assignments, incentive systems, and the list goes on.
By the way, we also need to execute against all of these so well that we ensure our customers are not impacted negatively. These are not easy, and they do require strong planning and governance. We have an opportunity to improve our integration execution. Go-to-market strategy is another area that requires more attention and better execution, starting with customer segmentation. Who are we targeting and with what products and solutions, and how are we going to sell and support these customers? Just as integration cannot be considered a monolith, nor can the enterprise customer segmentation. There are specific personas within enterprises that we need to design our selling motions towards, including developers, marketers, operational and business leaders. As such, our Sinch platform is integral in our go-to-market strategy, in addition to traditional selling and customer success motions.
Integration and go-to-market are top of mind for me and the rest of the team, and we're urgently assessing our plans here along with other value creation opportunities. I look forward to sharing a more comprehensive plan with you in the future. Until then, thank you for joining us today and for giving me this opportunity to speak with you. I'll hand it over to Roshan now.
Good afternoon, everyone, and thank you, Laurinda , and welcome again to your first earnings call at Sinch. Let me begin by summarizing the first quarter if we move to slide five. We identified three priorities in Q2 2022, which are cost control, cash flow and growth. We are executing accordingly. We are pleased to see that cost development is in control and in line with actions taken. Adjusted OpEx has reduced by 4% in constant currencies, excluding one-offs in the quarter versus the second quarter of 2022 when we started the cost reduction program. If we look at the Sinch parameter prior to the 2021 acquisitions, adjusted OpEx is reduced by 60% over the same period. Net sales grew 6%, gross profit by 8%, and adjusted EBITDA by 10% year-on-year.
We have a diversified business and several segments grow well, while others experience challenging market conditions. However, on the overall basis, margins are slightly increasing, with gross margin going up one percentage point to 33% in the quarter when compared to last year. We've also taken the next steps in integration and implemented organizational changes, and launched a combined leadership for messaging and email to accelerate product integration and unlock cross-sales potential across regions and customer groups. I'd like to remind everyone that this is a clean quarter. No acquisitions during the last 12 months, and hence we have the same parameter in Q1 2023 as in Q1 2022. Our leverage ratio, which is net debt to adjusted EBITDA, excluding impact from IFRS 16 leases, remains stable at 2.7x.
We're also excited about bringing to market an application suite to enable enterprises to deploy conversational messaging within marketing and customer care. This is a true integration success building on functionality from MessengerPeople and Chatlayer, as well as leveraging Sinch's Conversation API. Moving on to the next page. When we look at Q1, we can conclude that we continue to see positive effects from the cost reduction program we launched in Q2 last year. The chart shows how adjusted OpEx has developed. Adjusted OpEx is defined as the difference between gross profit and adjusted EBITDA. The yellow parts show OpEx added from acquisitions in late 2021, whereas the green part shows the organic development, where you see a flattening out after a short increase from early 2021 to early 2022.
Total adjusted OpEx in SEK is 1% lower in Q1 2023 compared to Q2 2022. In constant currencies, excluding one-off items, it is 4% lower. The cost reduction program launched in the second quarter targets primarily the green area on the chart, which is the cost base before the acquisitions at the end of 2021. Looking at this cost base, adjusted OpEx is down 6% in local currencies since we launched the program. Looking at Q1 2023 versus Q4 2022 sequentially, costs are lower. This is true also for the green part of the chart when you add back the SEK 60 million of one-time items that we called out in Q4 2022. We have also called out a resolved provision related to legal fees invoice, which benefit OpEx with around SEK 35 million in the first quarter 2022.
Let's move on to the next page. Page seven shows a bridge explaining our underlying gross profit development. In Q1 2023, we had organic gross profit growth of -1% across the entire business. Excluding the impact from a previously communicated price change to one of Sinch's largest customers, organic gross profit growth would have been positive. Since there have been no acquisitions during the last 12 months, we don't need to look at performer development. Gross margins were 33% up compared to 32% in the comparison quarter last year. The Swedish krona weakening against major currencies has helped gross profit growth by SEK 189 million or 9%. When speaking to the individual segments for messaging, organic growth in gross profit was -8%.
Again, excluding the impact from the previously communicated price change, organic gross profit growth would have been at +3%. Messaging volumes were up 2% year-on-year, which has been affected by the economic downturn. Lower volumes of traffic from large senders who have been sending at low margins and reduced domestic travel and traffic in Brazil, where we continue to lose share. Turning to voice. Organic GP growth in the voice segment was at -2%. This includes a negative effect from the A2P regulation change in the U.S., which is 4%, without which we would have been positive at +2% organic GP growth. The number verification business continues to be a strong contributor to growth in the voice segment.
In email, organic GP growth in the email segment was 23%, driven by new customer acquisition, volume growth, and improved gross margin from moving to a different cloud service provider. Within SMB, organic GP growth in the SMB segment overall was 2%. We see that we have extremely strong growth in the U.S. market and in the online self-serve businesses, which is offset by slower growth among larger customers, larger enterprise customers in Australia. Turning to page 8. This slide shows pro forma figures for Q3 and Q4 2021 to ensure compatibility, and shows the gross margin and adjusted EBITDA margin development over these quarters. Gross margin stability shows the strength in our product proposition towards customers. We believe we can improve this over time as the higher margin products are growing faster.
In Q2 2022, as you know, gross margin and gross profit was affected by a reassessment of reserves for accrued traffic costs by SEK 162 million, which affected both gross margin and adjusted EBITDA margin. Stable gross margin over a longer period of time is what we see on this page, and there is of course some difference in seasonality between affecting gross profit and OpEx as well. Moving on to slide nine, which shows our income statement. Worth calling out here is that we have currency effects affecting revenues, gross profit and EBITDA. When we compare reported and adjusted values, the largest adjustment items between EBITDA and adjusted EBITDA is integration spend at SEK 47 million.
This relates mainly to integration of platforms in our messaging segment from previous acquisitions, and in our SMB segment, the migration of SimpleTexting onto the MessageMedia platform. We also have some operational foreign exchange rate losses and a small earn-out payment related to tax items in Brazil from the acquisition of TWW. Depreciation and amortization of SEK 605 million for the quarter includes non-cash amortization related to acquired assets of, and that non-cash amortization is SEK 496 million. Adjusted EBIT grew to SEK 725 million, excluding EBITDA adjustments and the amortization of acquisition-related assets. Net financial expenses were SEK 162 million in the quarter, with interest costs amounting to SEK 133 million, which gives us an effective interest rate of close to 5%.
The group's effective tax rate in the quarter was 3%, which is lowered by recognition of deferred tax assets and remeasured deferred tax balances due to changed tax rates. Please turn to page 10. A clear focus for Sinch, I mean, one of our top three priorities has been cash flow. Within that has been reducing our overdue accounts receivables. This graph shows days sales outstanding and includes all of our accounts receivables, both billed and unbilled, as well as accrued income. Also includes pro forma net income. DSO was down in the quarter at 56, which is down from 60 in the fourth quarter. This has been possible due to continued focus on recovering outstanding customer receivables.
Moving on to slide 11, where you will find a bridge from adjusted EBITDA to cash flow before changes in working capital, and to explain the effect between these items. As in the previous quarter, we calculate cash conversion after CapEx, tax payments and interest payments. Normally, over a longer period of time, we believe this business should be in the 40%-50% range. Last year, we had a release of working capital, which helped cash conversion. On a rolling 12-month basis, we have, as of the end of Q1 2023, a cash conversion of 60%. However, in the quarter, cash conversion was at 7% caused by decreased accounts payable and higher paid interest. Also, paid taxes tend to be seasonally higher in Q1. Please note that working capital can be a bit lumpy as we have large enterprise customers.
A payment from one of our larger customers ending on the right side of a quarter end can affect this KPI significantly. Please turn to the full cash flow statement on page 12. Note that we paid down debt by over SEK 300 million during this quarter. Cash flow from operating activities for the quarter was at SEK 212 million. We have a strong financial profile with a diversified earnings pool and also networking capital as a percentage of sales continues to be low, which shows the asset-light nature of the business. The group had a closing cash balance of SEK 1.9 billion as at year-end. We have available bank overdraft facilities of SEK 911 million. Please turn to page 13, where you see net debt over adjusted EBITDA, our leverage measure.
Three components affect net debt over adjusted EBITDA, adjusted EBITDA growth, cash generation, and also the immediate currency impact on debt with the trailing impact on earnings. In the quarter, we are happy to see the flat development of net debt to adjusted EBITDA. We expect to continue deleveraging this during 2023 and from both from earnings growth and cash generation. Turning to page 14, we reiterate our unchanged financial targets to grow adjusted EBITDA per share with 20% per year and to keep net debt over adjusted EBITDA below 3.5x over time. Adjusted EBITDA per share grew 55% in Q1 2023, measured on a rolling 12-month basis.
Net debt to adjusted EBITDA is at 2.7x, which is well within our financial goals, and a reduction from 3.2x as at the end of the third quarter 2022. For the last 12 months, there is no difference between pro forma and reported EBITDA, but the KPI excludes the impact of IFRS 16 related leases on both net debt and adjusted EBITDA. Turning to page 15, I'd like to reiterate the priorities that we set out in the second quarter of 2022. We continue to work with cost control, cash flow, and growth. Looking at our entire business, we have a healthy business with stable and slightly growing margins and a very diversified earnings pool. There's still potential to extract further cost and revenue synergies from the acquisitions closed in late 2021.
With this summary, I would like to hand over to Laurinda to highlight some of our recent announcements about our partnerships with the world's largest global tech companies. Please, operator, please move to page 16.
Thanks very much, Roshan. Partnerships and ecosystems are important ingredients to any go-to-market motion, and that is true for Sinch here. We are uniquely placed to serve large global cloud platforms who want to make customer communications a part of their offering. A few reasons why that's true. Our customer communications cloud covers all the most relevant communications channels that businesses use to communicate with their customers. We handle hundreds of billion interactions across messaging, voice, and email.
We support both established technologies like SMS messaging and emerging channels like WhatsApp and Apple Messages for Business. We operate the largest independent voice network in North America, and we control our value chain with direct connections to hundreds of mobile operators, which improves our delivery rate, shortens latency, and ensures data remains private. During Q1, we've announced important partnerships with Salesforce, Adobe, and Microsoft.
Let me talk through a few of these, or actually through all of them and explain why. Together with Salesforce, we ensure that businesses can communicate with their customers throughout the world using SMS and new messaging channels. We've worked with Salesforce since 2014, with product teams in active engagement to align roadmaps and deliver new functionality. We also have a strong relationship with Adobe, and we recently were awarded Adobe Digital Experience Technology Partner of the Year award for customer journeys. With Adobe, we have built out some very innovative functionality for conversational messaging, where they leverage our capabilities across multiple communications channels. Here we have also have a new partnership model where Adobe resells our product, which is a step up from our previous engagement with them.
Turning to Microsoft, we enable businesses to use their Microsoft Teams product to call and receive phone calls through the regular PSTN voice network. Here we made two announcements. One about enhancements to our products that make it easier for third-party system integrators to help set up and configure voice calls in Teams. A second related announcement calls out our cooperation with one such partner for professional and managed services. Moreover, we also work with Microsoft in different use cases, leveraging other products than voice. Of course, there are many more customers and partners beyond those we showcase on this slide. Engaging with customers is one of my top priorities as CEO, and I've had the opportunity to have several calls this week with customers.
An example, I had a great conversation with a leading European martech company just yesterday who uses us for SMS and now looks to switch to Sinch also for email. They send around 700 million SMS messages per year on behalf of their customers, we are one of two suppliers to them. They also send more than 10 billion email messages, a service they are currently buying from a competitor. As we now have capabilities across both messaging and email, we see opportunity to significantly increase the scope of that particular engagement and relationship with that customer. I would say that each of the conversations that I've had with customers this week have reinforced the thesis around Sinch building and acquiring, or through acquisition, building a portfolio of services across all communication channels. The customers see the value proposition.
They are excited about the portfolio of services, and I am really looking forward to helping to take Sinch to the next level by leveraging that entire portfolio on behalf of our customers. With that, I'll turn it over to operator, I'll ask you to start us into the formal Q&A session.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star two. At this time, we will pause momentarily to assemble our roster. First question comes from the line of Akhil Dattani from J.P. Morgan . Please go ahead.
Hi, good afternoon. Thanks for taking the question. Could I start just really asking about the trends we're seeing at the moment and just maybe how we should try and think about them? There's two parts of the question. One is you've now reported two quarters of negative trends. I'm trying to understand how we should think about it. I mean, it's clear that there's a macro element to this and the economic environment is unhelpful. If we look at your peers, they still seem to be reporting double-digit growth rates. I'm just trying to understand what you think the difference here is. Do you think it's that those operators are just behind the curve and they'll ultimately see the same trend as you? Or do you think you're underperforming?
If you think you're underperforming, why do you think that is? The second part of the question is really about how we think about the look forward. Obviously we know that comps should get easier over the next couple of quarters due to various items you've been highlighting over the last 12 months. I wonder if you could remind us of how big those comp items are. I guess ultimately what I'm trying to understand is, do you think that's sufficient for trends now to stabilize and accelerate, or does the macro make it too difficult to call? Thanks a lot.
Akhil, this is Laurinda , and I'll kick off, but then I'll turn it over to Roshan to finish out. With regards to the past two quarters, I would say in Q4, we did talk about the headwinds from a macro standpoint. In Q1, I wouldn't say that anything has worsened necessarily, but certainly we have a full quarter impact of those headwinds. I think that's what you're seeing, you know, different sequentially, if you will. I think what's really important to note is that demand is still very much there. We see that in the form of new customer acquisitions. You will have seen in our report today that email specifically, GP has grown by 23%.
On the messaging side, even though we have a large base on the messaging side, which has been impacted with regards to macro, we do still see new customer acquisition in that part of the business. Our SMB business in the U.S. very specifically continues to grow very nicely. I think that we have a bit of a tale of two cities, if you will. First is, you know, the larger base that is being impacted by the macro. We have the other parts of the business that are poised for substantial growth go forward.
Yeah. Thank you. Thank you, Laurinda . I think that was great. I mean, if I, you know, if I were to expand a little bit first on those, I think, as Laurinda said, I mean, we have, we do have parts of the business that grow well. I pointed to email. I think if you look at the online self-serve business within SMB, you know, we have similar trend. I also think, you know, gross margins are stable to increasing, which is a positive sign. Where we see the impact is primarily within transaction volumes from, you know, from larger enterprise customers in messaging, in both the messaging segments and to the extent we have large messaging customers in SMB, you know, where we've seen kind of volume reduction.
I think Akhil commenting on the comparison you made, competition or industry. I mean, our, you know, in our industry you have several different companies that differ from each other in terms of the offering. What we can see, in terms of looking at the market in general, is that whatever growth rate that the company has had, you know, going back two, three quarters, they have definitely decelerated from that level. The levels have been different. Our understanding is that we're not losing market share. Rather, you know, we see in terms of signing new accounts and, growing with existing customers by adding new products. We have continued strong development.
We signed 37 new customers within messaging. With the large enterprise accounts the last quarter, that's been, you know, fairly stable or there's a bit of seasonal effect of course, but that's been fairly stable over the last four to five quarters we have reported. Then maybe, I mean, you know, just to close off, I mean, if you as I said in my remarks, if you exclude the price negotiation impact, you know, we would have had positive growth overall in Q1 and in messaging we would have had, you know, organic gross profit growth of +3%. That, you know, I think you can calculate the impact, you know, from that from that KPI. The look forward, we're not providing guidance.
You know, there's a number of puts and takes. Obviously, as you correctly identified, we have a couple of, you know, we have both the price negotiation and the one-off, you know, reassessment of traffic costs, working in our favor in Q2. It's, you know, it's difficult to call kind of how exactly Q2 will turn out at this point in time.
Okay. Thank you.
Thank you. Our next question comes from the line of Andreas Henriksen from Danske Bank. Please go ahead.
Hello, everyone. So many questions, so little time. I'll limit myself to a couple. On prices, if we continue there, you said that it's a little bit tougher towards the larger customers while there are opportunities among the smaller ones. Can you elaborate a little bit of how large these price increases are that you implement, and if there are any new renegotiations coming up towards any of the larger ones? Secondly, maybe, for Laurinda, you mentioned integration execution opportunities. Where do you see those opportunities, and what sort of what are your learnings from these couple of weeks when it comes to integration and what Sinch has been doing so far? Thanks.
Yeah. Why don't I start with the integration, and then I'll hand it over to Sören on pricing and renegotiations. On the integration side, you know, there's lots of ways to define integration. We acquired so many companies not only over the past two years, but over, you know, really, the last 15 or so years. The group has done a really excellent job with regards to some of the product integration and platform migration work. Integration is complex, and it's much broader than just product alone. By that I mean it spans across everything from, you know, infrastructure, core IT systems, you know, people culture, Salesforce integration relative to customer accounts management, incentive systems, et cetera.
It really is, it's quite complex, and does take some time. I would say that the platform migration has been underway and we've seen some success there. We know it takes some time, and so we expect that to continue. We've not reached our full potential or taken advantage of the acquisitions themselves as it relates to the growth opportunities and leveraging the product portfolio across all of the customers that we serve. Those are some of my initial observations, Andreas. We, you know, we'll be putting together some very structured plans and targets to achieve those growth opportunities.
Maybe I can take your second, your first question, second here, Andreas. I think the, you know, when we looked at the pricing negotiation that we had with the, which affected our messaging growth starting from Q2 2022, we found that this is a customer that's been with us, you know, for many years and, you know, we have grown with this customer. Therefore, you know, we had pricing and margins that were maybe a little bit, you know, not relevant to the volumes that they, you know, kind of used us for, delivering now, right? When we've looked through our portfolio, and this is something we commented earlier, we don't see any other large customers that have that situation.
I think the other thing is that, you know, the macro impact has meant that, you know, many of our large customers have been looking closely at their, at their larger suppliers and evaluating what opportunities there are to reduce prices. You know, if there were to be any such discussions, I would have supposed that they have already happened. There's nothing that is, you know, has had a material impact on us. That being said, I mean, you know, of course, individual pricing discussions will happen from time to time. When you look at margins, you know, over the entire period that we have been reporting now 7 quarters on a pro forma basis, I mean, they continue to be stable, and they also continue to be stable within the individual segments.
I think that's another indication of kind of pricing stability. Now on the price increase that we did, that was specifically in messaging. It was late in Q1, so the full impact is not in Q1. It's going to be more in Q2. We haven't disclosed a specific percentage, but remember that, you know, even a smaller percentage increase on top line results in a 5x impact, you know, on gross profit, because of our gross margin percentage being 20% in messaging segment. I think the other comment is that this is obviously not in our entire base. I mean, this price increase was not done on our very larger customers, but rather on the next level of customers within messaging.
Very clear. Thanks a lot, I appreciate it.
Thank you.
Thank you. Our next question comes from the line of Predrag Savinovic from Carnegie. Please go ahead.
Thank you, operator. Thank you for taking my questions. My first one is to Laurinda, and thank you for the intro you did as well. I know it's clear you spent quite limited time with the business so far, but I'm still curious if you during your time now or doing your own diligence of Sinch have found certain improvements you could do in sales processes. Is there anything you can add on acquisitions, organizational structures or something of that kind? Because you've been running similar things as your previous employer.
Thanks for the question, Predrag. It's your point. It's been just a few weeks or almost two weeks at this point. The organization as a whole has gone through a tremendous amount of change, including the sales organization. There's opportunity to leverage CRM differently. There's opportunity to leverage account planning collectively. There's opportunity to think about customer segmentation consistently across all areas of the business. With that, there's opportunity to leverage our digital channels as well, more effectively by ensuring that our product portfolio and pricing capabilities are loaded in those digital tools so that customers can self-service. There's a number of opportunities across the go-to-market that I see as, you know, low-hanging fruit to improve and become more effective.
You know, I would also note that it's low-hanging fruit to suggest and make the changes. there's some time where that has to soak in, that new discipline has to soak into the organization. you know, and the opportunity to have different types of conversations, more comprehensive conversations with our customers, takes a little bit of time for the sales cycle to work its way through, and for revenue to ramp against that. That being said, again, the digital channel piece, you know, that should be a quicker time to value. said a lot. There's, there's definitely plenty of work for us to do and to execute differently.
That's clear. Thank you.
Thank you.
Could you double click a bit on the customer wins you've done? You mentioned 50 Q4, around 40 now in messaging, and this is typically then the segment that serves quite large businesses. Without knowing anything of their size, this number doesn't give us that much at this stage. What do you, Roshan or Laurinda , what do you expect from these wins? What should we expect here?
I mean, you know, I think, Predrag, Roshan here. I think just a couple of comments maybe to give a little bit more color. What we disclose is of course the number of customers. The way we classify an enterprise customer is when they are above a certain threshold and that threshold varies a little bit by geography, but overall it's around $3,000 in monthly gross profit, or at least that we have a potential to reach, you know, $3,000 in monthly gross profit at that customer, right? There is then that's a lower threshold. Of course, that number could be very high, I think in the case of individual customers, but usually there's a ramp-up time as well.
Now, what we've seen historically is that, you know, our business performance within messaging is more depending on the base, rather than on recent new ads or recent churn. Which is a little bit, you know, also speaking to the stickiness of customers, you know, of products in our business. You know, because of the ramp-up time associated with enterprise customers, you know, they've been around a while before they make a material contribution.
Okay. That makes sense. Thank you.
Thank you. Our next question comes from the line of Stefan Gauffin from DNB. Please go ahead.
Yes. If I could start with, continued question on the pricing in messaging. It's a mixed effect. You have pricing increases towards, small customers, and there you clarified that came in quite late in the quarter, so we should see a full effect in Q2. That was against also price pressure within the large enterprise space. Can you comment if we have seen the full impact there or if you're still seeing, continued price pressure from large enterprise? Should we expect an improvement overall? I'll start with that question.
Thank you, Stefan. Thomas here. To try to give a little bit more, more color. The macroeconomic environment, you know, had some impact on our operating metrics at the end of Q4. What we're seeing in Q1 is that, you know, it's been persistent, not necessarily worse, right? Well, you know, just from that angle, it impacts the numbers in Q1 a bit more than in Q4. Having said that, you know, Q1 performance is quite similar overall to Q4. You know, one of the things that positively contributes, right? If macro is contributing a bit more on the negative side, one of the parts that is contributing positively is the price adjustments that we've made later during Q1, towards a set of our messaging customers.
You're correct that the full run rate impact of that's not seen in Q1, but we will see that in future quarters. When it comes to larger customers, of course, we called out one particular customer back in Q2. We've had some other such conversations both in the messaging and the voice segments, which we talked about during the autumn. This is what we see again. Now we've seen that realized in Q1, rather than, you know, indicative in H2. Not necessarily seeing, you know, further deterioration. With that said, you know, of course, who, you know, we don't really wanna speculate on macroeconomics. From what we know today, we feel we have the, you know, those negatives on a full run rate impact right now at least.
Hard to speculate on the future. Some things we know will improve, of course, that alone should ease or should improve performance in coming quarters.
Yes. Thanks. Then, two very quick questions, if I may. You're charging quite large integration costs each quarter. When are we seeing an end to the integration processes for these charges? Secondly, the gross margin in the voice business is down 2 percentage point quarter-on-quarter. Is this due to pressure in the more high-margin CPaaS business, or are there other explanations?
Yeah. I think, I mean, on integration, I mean, what we're charging to integration today, primarily, I think we're at SEK 47 million in the quarter, is the migration of the SDI platform and the LATAM, you know, the two platforms in LATAM from the acquisitions that we did there, to our central messaging platform and the migration of the SimpleTexting, you know, platform to a MessageMedia centralized SMB platform. Those are the platform migrations that are ongoing. We do believe that, you know, within the next 12 months or so, we should be rounding off the majority of these platform migrations. Most of the other costs of integration, we actually take as, you know, normal OpEx, including investments in new ERP platforms, et cetera.
Coming to your second question on voice margin. You know, that is primarily a result of, you know, as we see kind of the Y-o-Y impact as well as the, you know, renegotiation with customers that Thomas mentioned. You know, that as well as a mix effect. It's really several different things, you know, kind of playing into that. You know, in voice we have some products that have a traditionally higher margin that are not growing as fast. We have the enterprise business, you know, within voice that is comparatively lower margin but growing much faster. You kind of get a mixed impact of that affecting the voice margin.
Okay. Thank you.
Thank you. Our next question comes from the line of Daniel Djurberg from Handelsbanken. Please go ahead.
Thank you, operator. Hi there, Laurinda . Welcome aboard, and hi, Thomas and Roshan.
A couple questions for, if I may here. Starting off, perhaps going back to North American messaging, revenues fell off some 18% despite hefty tailwind from currency. We know obviously this is coming from price negotiation with large big tech customers, of course. Can you give some more color on the volume impact in North America? Also if these price negotiations have spread to other big techs, given this large drop year-over-year?
Thank you, Daniel. A bit more color here. I think, you know, one of the reasons we call out this price negotiation or this change from Q2 is of course the financial impact. It's also calling it out because it is quite unique. This is a, you know, a large global tech company who we worked with for several years, but we're truly seeing some outsized growth. At, you know, a comparatively healthy margin. Eventually, as the priorities shift, also with our customers, they will look to improve and change, and focus a bit more on profitability versus growth. That's the sort of underlying reason. The background is quite specific to this one particular customer.
You shouldn't necessarily extrapolate to others. In terms of where we see discussions on price, it's contained mainly to larger customers. Those discussions were happening during autumn with the, you know, what we believe is with the full effect during Q1. In terms of volumes, it's again specific to this particular customer, which, you know, has a quite unique setup in how we cooperate. We're not really sure exactly where that ends up. As you know, we will, 12 months would have passed since we made the price adjustments when we entered Q2, we've also seen the volume decline, right? Annualizing parts of that have changed. You shouldn't really extrapolate this to any other customer, at least we don't.
Is it possible to give any color on the underlying volume on the rest of the customer base in North America?
I mean, you know, I think, I think again, you know, not... What we can see is that there is a trend among enterprises to kind of evaluate their cost base and kind of optimize, right? That means that, I mean, you know, it's also interesting, you know, kind of we do see some customers, kind of moving to our email products or using our email products more. You know, they're looking for alternatives. You know, they're also, looking at ways to kind of reduce, you know, touch points, since SMS has come with a cost. There's a number of, you know, kind of different ways that they're using to optimize, you know, their cost base.
You know, the underlying that is a strong digitalization trend, and we continue to sign new customers and launch new use cases. In the short term, you know, there is a volume impact, right? As they kind of adjust their cost base.
Okay. Fair enough. If I may, a question on the price increase, as you mentioned, again, Stefan asked the question, impacting quite late in Q1. Would it be possible to give a ballpark, any comment on the impact, which would have been if this, cost impact or sorry, price increase had happened, you know, January 1st instead of late in the quarter, on the gross profit growth in the quarter for messaging?
Well, I think we're unwilling to give any more sort of numbers on that. I think, you know, other than to say that we're seeing a full quarter impact from macroeconomics, which was a partial impact in Q4. One of the big components of setting this is the price changes. I think that's where we leave it.
I think I would also, Daniel, if I may, I would just add, pricing is a lever and we have to be very sensitive to what the market will bear. You know, we will take appropriate actions whenever we see the opportunity or need to, or, you know, if our costs increase for whatever reasons. Again, it's a lever, but as we think about growth in this business, you know, we will be focused in on the opportunity to cross-sell and upsell our existing customers and to take market share. I understand the reason why you want the to understand the impact of pricing, but just understand it's almost going to become a part of business as usual, but growth really needs to come through those other areas.
Perfect. A super quick follow-up just to Roshan on the finance cost, on the interest cost outlook for, sorry, for the full year. Should we extrapolate on what you saw in the quarter, given that you have prolonged financing, you know, up until 2026? Or can you give any color on the interest cost?
Yeah, I mean, I think we have, I mean, you, we had an effective interest rate of 5%. I mean, that's of course a bundle, right? Of different interest rates. I mean, I don't have the crystal ball for how, you know, kind of benchmark rates will develop. I think if you look at most of the banks, the things will decline later in the year. You know, again, we have to look at... I don't have more information than that to share.
Thank you.
Thank you. Our next question comes from the line of Daniel Thorsson from ABG. Please go ahead.
Yes. Thank you very much, and welcome, Laurinda . Two questions. First one on the peers. We see a clear profitability focus and leaving growth ambitions behind, obviously. Should we see that as a positive change in competition for you? Or is there anything else to read into that regarding medium-term growth in the market that there may be a risk that many of you have overestimated the sustainable market growth that is being adjusted now by those peers? That's the first one. The second one on the email segment. Is the strong organic growth in the current quarters a result of that product being a lower cost communication channel than a text message?
When we see messages coming back, could that be a headwind for email, or is that really to overanalyze the strength there?
Yeah. I'll try and answer some of it. Again, the guys can add in. First of all, I think it's super important that we all remember that Sinch is profitable and has been since day one. I think that's something that we're very proud of and will continue to be an important part of how we operate this business. That's first and foremost. The competition that you mentioned certainly is striving for profitability, but it will be a long time before they get there given, you know, given some of the language that they've shared with the market more broadly. I don't think that their quest for profitability is because that we have underestimated the market demand and the market opportunity.
I think, quite frankly that, you know, it's an economic reality that all businesses are living with today. The profitability is important. It makes logical sense and appreciate the fact that they're striving for it. Some of the actions that they've taken to achieve profitability or to step towards profitability, does benefit us quite honestly, because they're having to take significant costs out of their business model, some of which has impacted customers. As customers are experiencing that degradation of service, Sinch, you know, is able to take advantage of that, quite honestly. We service our customers in a way that is superior to what they've experienced with some of the competitors.
You know, while we have a focus on costs, certainly and will continue to do so, we have not had to take the dramatic changes or have not had to take the dramatic costs that some of our competitors have had to. A long-winded way of saying, we're very proud of the profitability. Demand absolutely is still there, and we can take advantage of the challenging environment that some of our competition has found itself.
Did we answer your question, Danny?
Yeah, absolutely. That's great.
Thank you.
The second one on email strengths.
Yeah, I think it's, you know, I mean, email's been around a long time and is a viable option for many use cases. In fact, it's a preferred option for many use cases. I think, you know, our belief is that from a long-term perspective, this is going to be about what delivers the best customer experience rather than simply about cost, right? In many cases, you know, text messaging is a superior alternative in the sense that it has a higher read rate. It's more immediate. You know, and also to deploy certain use cases like customer care, we believe conversational messaging is a more effective alternative, and which is the belief underlying our long-term messaging engage produc t.
You know, short-term levers, you know, in terms of cost, but I think the long-term is more about, you know, kind of how do you enable customer experience in the best way.
Yeah. I see. That makes sense. Thanks.
Thank you. Our next question comes from the line of James Pavey from Bank of America. Please go ahead. James, your line is unmuted. You can please proceed with your question.
Sorry about that. Thank you very much for taking my question. Thomas, a quick question for you. I think earlier in the call, did you mention that most of the conversations that you'd had with your enterprise customers about pricing pressure happened in autumn? The question is, have you seen, can you give any color on what those conversations have been like this year? Relatedly, a quick question, in FY 2022, I believe your revenue, 21% of your revenue was from your top 10 customers. If I look back, say at FY 2021, say on a pro forma basis, any indication kind of like the trend for those top 10 customers? Thank you very much.
Thank you, James. I think what we were trying to depict was as the world turned during 2022 and many businesses, you know, started to reassess their operating, their ways of working and started to address costs. The use of communication, you know, is one of many costs which businesses have been reviewing. We started to take notice of this, especially in our messaging business and our voice business during the autumn, and that's what we called out in previous earnings call. It takes a while for that type of dialogue to, you know, to turn into something concrete. We think this has played out as we expected, and it hasn't necessarily worsened.
You know, with the caveat that we never know what the future holds and how macroeconomics will develop. You know, we do think that, you know, it's played out as we expected. It impacts our numbers, but we're not building backlogs, if that makes sense. That was answering your first question.
Certainly it does. [crosstalk]
Customer concentration, [crosstalk] I think the short one to that, James, is that, you know, customer concentration has been declining. The top 10 share of our total revenues continues to decline.
Perfect. Very helpful. Thank you very much, both.
Thank you. Our next question comes from the line of Laura Metayer from Morgan Stanley. Please go ahead.
Good afternoon, everyone, and thank you for the introduction, Laurinda. I have two questions, please. The first one is could you clarify the headwind from the discount to a large customer in messaging will be fully in the base in Q2? What I'm trying to understand is whether that happened at the beginning of the quarter, in the middle or towards the end of the quarter. If it's fully in the base, is it fair to assume that we should see positive organic growth for the rest of 2023 now that it is behind you? The second question is on the messaging adjusted EBITDA margin. Could you please give more color as to why it's down sequentially versus Q3 and Q4 last year? How should we expect it to trend going forward, please? Thank you.
I think on the 1st question, the price impact is from the 1st of April 2022, Laura. You know, it's fully in the base after Q1. There is also a volume decline from this customer. You know, that's happened gradually during the year. Again, as we commented on it in the messaging segment in general, there is a volume decline. That's obviously not in the base, but the price impact is. I think we speak specifically to the fact that excluding this customer impact, I think in Q1, we would have had within messaging +2% organic growth. We're not guiding for the coming quarters. Your second question, Laura, if you.
It's around the adjusted EBITDA.
I think that is that goes back to the scalability both upwards and downwards in our messaging business. We do have a seasonal impact where H2, you know, historically and especially Q4, tends to be stronger, you know, commercial, commercially, quarters for enterprises. We do tend to probably see a weakening in Q1. Also it's got to do with the number of working days. I mean, you know, if you look at Q1, we do have short months in February and fewer working days as well. I think that that kind of plays in plays into the margin.
The final thing I would add, if I may, Laura, is that, again, we noted that there were close to 40 new customers in messaging, in Q1. We haven't seen the revenue impact of that, right? That takes a little bit of time to ramp, so that new revenue will show itself up in subsequent quarters.
That's really helpful. Thank you both.
Thank you. Our last question comes from the line of Mohammed Moawalla from Goldman Sachs. Please go ahead.
Great. Thank you very much. Hi, Laurinda . Hey, Roshan, Thomas. I had two. First one, Laurinda , as you look at the business, you talked a lot about efficiency, about kind of operating more efficiently but also growing. I'm just curious to understand, do you feel that is it just better integration and extracting perhaps more efficiency and savings? Or do you see the scope for the business to potentially shrink in size and drive more kind of focus to drive to deliver on that? 'Cause obviously you've just gone through a lot of M&A prior to the last 12 months. Second one for Roshan. I mean, obviously cash conversion was sort of very strong last year. It's come down in Q1.
Can you give us a sense of how long perhaps some of the payable effect or reversal will continue? Should we think of when do you expect to kinda hit the run rate of the 40% normalized run rate? Is it something likely to be sort of in the second half of the year, or is it more likely to be a 2024 event? Thank you.
Hi, Mohammed. Good to meet you, and thanks for the questions. I think the essence of your first question is, do I anticipate or foresee any divestitures? The quick answer to that is no. The Sinch portfolio, I think, is very comprehensive and is poised to grow collectively, go forward. In terms of operational efficiencies, or operational excellence, you can find that in lots of different places within the organization, within any organization, quite frankly. You know, so as we think about business processes, as we think about the tools and the systems that we use to operate the business, as we think about the amount of, you know, people we have facing particular functions or particular customers even, all of that needs to be assessed.
There's plenty of opportunity to do that here. That's what I'm talking about. I'm not talking about divestitures.
Well, let me take your second question there. I think, you know, as you rightly identified, we had a strong cash conversion last year. I think on a rolling 12 months, including Q1, we're at 60%. What we have believed, of course, is that we should be in this business be able to generate a cash conversion of somewhere between 40%-50% on a going basis, on a continuing basis. Now, when we talk about cash conversion, we include CapEx, interest and tax. Obviously, you know, within an increasing interest environment, you know, we do have negative impacts from that.
Q1 also tends to be a quarter where we have, you know, slightly higher, seasonally higher, tax payments, you know, as we close out 2022. Finally, as you said, as you identified, we do have, you know, decreased account payables that I also included in my remarks. On the other hand, DSO continues to trend strongly. Now, working capital can be a bit lumpy from quarter to quarter, but, you know, I believe that, you know, we will continue to generate strong cash for the rest of 2023, and we will continue to deleverage.
This will go up a little bit, you know, in the longer term from up and down a little bit in the longer term from quarter to quarter, but we're convinced that the 40% plus cash conversion is very much on the table for Sinch.
Sorry, that last bit. Is it 40% on the table for 2023?
More than that, yes. For, more than 40% is on the table for 2023, yes.
Okay. Thank you, Roshan. Thank you, Laurinda .
Thank you, Mohammed.
Thank you. Ladies and gentlemen, this concludes our question and answer session. The conference of Sinch has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.