Sinch AB (publ)

Good day and thank you for standing by. Welcome to today's Q3 2021 Interim Report Conference Call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. And I would now like to hand the conference over to your first speaker today, Thomas Heath, Chief of Strategy Officer and Head of Investor Relations. Thank you. Please go ahead, sir.

Thank you very much, operator. And warmly welcome everyone to this Q3 2021 conference call with Finch, announcing the for discussing the Q3 results we released this morning. With me in the room today is Oskar Werner, our CEO, Roshan Saldana, our CFO, and Ola Elmelan in the Investor Relations team with myself. With those opening introductory remarks, I'll hand the word over to Oskar.

Thank you, Thomas, and thank you all for listening to this Q3 presentation from CINCH. So, without further ado, operator, if you go to slide number two, please. So, CINCH revenue past 12 months, 14 billion SEK, adjusted VDPA of 1.2 billion in the past four months, 2,424 people present in 49 countries. This is then Excluding the obviously recent acquisitions, we're up to some almost close to 3,500-600 people if you include all of those acquisitions. We do customer engagement through mobile technology. We do communications in messaging, voice, and video today. But as you've seen, we have significantly strengthened voice part. We are adding an email part, and we added a strong business unit focusing on the SMB segment as well. So we're rapidly expanding outside this definition and we will update it as the acquisitions close. We do 190 billion B2C engagements per year. This is close to 20 per mobile phone on the planet. And as you can see, this is going up gradually quarter on quarter. Again, this is on the messaging side. We serve 8 out of 10 of the largest US tech companies. We're typically one of their top providers or the top provider of cloud communication services. And this is a testament to our quality. They truly, this is a quality conscious buyer who really wants a global high quality delivery. That's when they choose Cinch. That is where I think we truly stand out against any other player on the planet. This market is fascinating because it's got 100% consumer penetration. We're talking about the communication between every single enterprise or every single business in the world, every single consumer in the world, over every channel that you are using. That's the size and the scope of the market. It is an extremely large and very attractive market that we're in, and we're one of the top two players in this market. We've been profitable since our foundation. We have never needed one single dollar to fund the operations of the business, apart from the $10,000 share capital that the founders invested in the first round. Every single dollar that we brought into the company has been for M&A. So very high profit focus, very high cash flow focus that we had during the business from its inception. If we go to slide three, operator, please. Third quarter highlights, we had a total revenues growth of 122%, organic growth at 41% on the revenue level, gross profit up 86%, organic gross profit growth 20%. We're continuing investing in OPEX in product and go-to-market, and we had adjusted EBITDA up 64%. The other The number two is acquisition of Pathwire and Messenger People. Pathwire is one of the largest email providers in the world, based out of San Antonio in Texas, present in a set of countries. They also have 100,000 paying customers each month. They have a proven developer-centric go-to-market models, so truly addressing the developer persona with a go-to-market model, which is something Cinch has not been strong at and has not been focusing on. So we're truly adding two things to this acquisition. One is a very, very strong email platform, and the other one is a very strong go-to-market model to the, especially the email developers. They have broadened this out and started to do the same for text messaging for developers who want text messaging as well. So they're clearly taking steps to broaden this developer go-to-market. Messenger People is a pioneer in customer care through messaging. They have some based out of Germany, in Munich in Germany, so 700 businesses as customers. It's a relatively small company, around about 50 people, but innovative and one of the conversation messaging leaders in Europe, and we significantly strengthen our conversation and messaging business, and especially our European go-to-market and volumes in this segment. Messenger People closed on 1st November. We're also doing investments in scale systems and people. And we have a fourth quarter where we project to close four transactions. We have closed messenger people. We are forecasting to close IntelliQuint, MessageMedia, and Pathwire all during this quarter. And as you can imagine, we're moving from If you look at Q2 2020, we were 820 people roundabout. If you look at end of Q4 2021, we're going to be close to 4,000. This is in principle over 18 months, scaling the business four times, 400% in terms of staff and in terms of most other financial metrics. As you can imagine, when you do this type of extreme growth over this short period of time, you have to take investments in order to just scale the business and i don't know how i could do that otherwise right also the investments that we take we need to do it before the deals close because otherwise we can't handle the close of them so obviously we but the investments we take now hit our evda now but they're actually geared towards handling a much much larger organization so the proportional share of them when these acquisitions close will be much much smaller This may be building out capabilities like ERP, CRM, HR, process, innovation, systems, data platforms, et cetera, in order just to handle the scale. We only take the straight integration, OPEX as integration. We're diligent about that. It's only when it's true integration we take it out. But we also have a set of scale-up costs, right, just a new ERP system, HR system, et cetera, right? And those typically, or we don't, you know, label as integrations. They come to the EVDA. And you see parts of those investments here right now. And the context you should have is going from 820 people to some 4,000 over 18 months. That's the context. We're preparing day one activities. I think we're doing well on these. We're gradually improving. We have a well-structured process for that. We're also, as you know, in IntelliQuint, we see their growth being lower than the Cinch growth, which we've communicated since the acquisition. And we're preparing to invest part of their cash flow and profit to increase their growth to match the Cinch group growth, right? So that's the $50 to $20 million U.S. investments that we're taking out of the IntelliQuint EBITDA, if you will, in order to increase growth. And we think that's highly possible, and it's very, very concrete. Operator, slide four, please. We see continued broad-based growth. It's something we worked on for a long, long time, and we communicated it many quarters ago, and we also communicate that we see now a broader-based growth outside the biggest customers that we have, the big techs from the U.S., and we see that continuing this quarter, which I'm very, very happy with. So on the gross profit level, 86% Q3 to Q3. organic gross profit 20%. The majority of this is coming now from the broader base, while the bigger tech customers in this quarter having a lower growth than average because we had some volume discounts with them. I think it's very natural as well. When customers grow very, very large, well, they come and negotiate price. And this is one of the quarters where we did negotiate the price fairly because their volumes are very, very large. But that said, in this quarter, they don't contribute so much to organic growth, and that's mainly driven by the broader base growth. As you can see that, you can see higher growth in transaction volumes and revenues up at 41%. There are three things that are affecting the gross margin. First, it is carrier pass-through fees. So basically, operators have increased prices What happens is they increase it one quarter, and then we increase our prices in the coming quarters. It is also the renegotiating volume discounts with some of our largest customers, which has an impact when it happens, and then it tails off in the quarters after. And then you have some mixed effect as well, depending on in what countries do we send and what margin do we have into these specific countries. Those are three main reasons to the gross margin effect. And that's the reason to the difference in revenue and gross profit growth. Operator, slide five, please. We're adding to volumes and methodings. We see we do 46 billion transactions in Q3. It's a 229% increase year-over-year and 97% higher revenues with 35% organic growth and 67% higher gross profit with 19% organic growth. Continued global growth and customer types. And you should know that SDI customer base is still growing slower than Cinch, which will affect the combined growth in Q4 when it's first quarter that they are actually reported as non-M&A. We are, however, seeing positive effect. We worked hard with that customer base and the sales team, and we're seeing positive effects in turning that growth as we had projected from start. but it's taking a little bit longer to get up to the full cinch growth level than the 12 months. But we see no structural reason to why this base would grow slower than the cinch base when we're applying all the same models as we're doing on the cinch side. Operator slide six, please. We are extending our conversation API with Apple Business for Business with Telegram and KakaoTalks and making this a you know even broader covering a lot of more channels basically and you can see the number of channels we're covering for enterprise this is very very powerful the the communication landscapes landscape gets more and more complex with more and more messaging apps and handling all of those and understanding how to handle them in various various jurisdictions and various processes is pretty tough and that's why we combine them with our conversation api and Again, there's no reason why we couldn't add the email services or other services to this as well going forward, basically. All right, operator, next slide, please. We have healthy growth in the voice and video segment. As you saw, this had a very strong growth before COVID and then took a hit during COVID. It's very logical because a couple of our largest customers are the ride-hailing customers in this segment. And obviously, during COVID and lockdown, that's a slower growth. So it's been a little bit lumpy over the last quarters here. We're now seeing them coming back to a healthy growth projection with 23% revenue growth, organic at 26%, and 44% gross profit growth with organic at 44%. Previously, we communicated that we had a temporary traffic at low gross margin that has now ended. So gross margin is going up from 18 to 28 as per previous communications in Q3. We're also preparing for the IntelliQuint closing. This is Cinch voice business, and this is then combined with IntelliQuint offering. It's a good combination where we're getting strong both in the higher levels of programmable voice, more software, and the lower level voice network. We see very strong growth opportunities for this business going forward, but we're investing in growth initiatives, both on the product and the sales side. Just a couple of examples. IntelliQuent, going into them, they have the best voice network in the U.S., the broadest reach in the U.S., the highest volume providers in the U.S., but they only are spending, I think it's around about 10% of their optics in sales and marketing. And relative to what we have seen or what any other SIPAs player have, a very low investment in sales and marketing. And we just say, hey, this fantastic network, if we invest more in sales and marketing, we will get more out of it. So it's things we've done before, things we've proven before, applying the same models, but selling more of a very, very good asset that we have. All right, operator slide eight, please. We have this quarter's strong performance on the operator segments, and this is the CINCH operator segments. Growth since Q420 driven primarily by the SDI acquisition, which had an operator business in them. And healthy growth and profitability in both CINCH and SDI businesses in Q3. We do expect continued earnings volatility between quarters in this quarter. in this segment. And then we have IntelliQuint is around about half of the real profit is geared toward operators. So that will be added to the operator segment going forward. And that's a significant piece, which is gonna be the largest piece for operator offering going forward. And very stable, very high profit on the IntelliQuint side, but lower growth than the general CPAS side. All right, operator go slide number nine, please. These are the acquisitions. I must say we're extremely happy about all the acquisitions we made lately. I think we have truly moved Finch to be one of the top two players in this business. On all accounts, you can count revenue, profit, adjusted BDA, message volume, call volumes, mail volumes. On any metric you would count, we would rank as one of the top two players in this very attractive market. I think we've gone from being a messaging provider and then adding IntelliQuint, being the largest voice provider in the US, adding MessageMedia, being the largest provider to SMB segments in the world, adding 65,000 customers and a strong online go-to-market model to SMBs, adding Pathwire, adding a strong email product and a strong developer go-to-market, and thereby covering the three biggest channels that I think we all use as communication between ourselves and enterprises. We all use messaging channels like text or WhatsApp or ABC. We all use sometimes voice and we all use email. And none of those channels are going to go away. And being one of the very, very few companies on the planet that can offer all of these three services at scale on a global level is a very powerful position to be in. Messaging people, smaller transaction, really moving us forward in the conversation messaging space. So we're looking back, I'm super, super happy and all our teams are very happy and the excitement in the sales teams about the ability to cross sell these different services is very, very high. Looking at slide 10, the pro forma here illustrates the greater scale. You can see the very, very significant moves we're making. We're very decisive about being a leader in this industry. There is nothing that will stop us from that, and we're really going for that. We think the market is very attractive in CPaaS, and we have our eyes set on being one of the top two providers, and that's what we are with these acquisitions. You can see going from the strong organic growth that we have and then adding IntelliQuint, MessageMedia, and Pathwire on the gross profit and just the EBITDA side, you can see the monumental shift that we're doing. And this is also why we need to and think it's prudent to take the scale-up investments in order to handle all of these acquisitions. Here we can also see the power of our growth model. We have strong organic growth. We have been ranging between 25% and 25% of the last quarters. This quarter is just 20%. There's no reason. We don't see any structural change. one quarter becomes super good like last quarter, and this quarter a little bit lower, but there's no structural change in that. But we see the very, very strong organic growth that we have had over the last, you know, many, many quarters over the last five years. And then we're adding the very strong M&A growth engine that we have. And combining these two, we have had, on average, the last years, the last five years, 1.50% growth year on year. you know, roughly half of that 25% being organic and roughly half of that being M&A driven. And I think that growth model is just very strong. We count on growth profits and it's a very simple reason for that. You cannot compare these business units or these businesses on the revenue basis because a Pathwire has like 80, 85%, 90% growth margin. while a messaging business has 20%, 25%, and comparing those on revenue, you would get overweight on the messaging side and under-prioritize the pathwire side if compared to revenue, right? So we need to compare it on a like-to-like basis, and the like-to-like basis is the value you create, and the value you create is basically the gross profit. It's as simple as that, and I think it risks very much skewing in any comparison if you compare it to anything else. The pro forma last 12-month revenue is 21.3 billion. So you can see the scale-up we're doing here. I think it's reported 14 roundabouts, or 12, sorry. And Roshan was giving me a look there, sorry. And the pro forma is 21. The gross profit of CX is 7.3. And the adjusted EBITDA of 3.2 billion. So you can really see the growth in the business that we're driving here. um all right operator slide 11 please um we're also adding structurally here right this is not only you know adding companies on top of it it's very carefully selected and it's we're adding structural competence to the business so you can see since it's been strong on the enterprise go to market where message media and pathwire were actually pretty not so strong a pathwire being very strong on the developer go to market signing up thousands of developers each month having a hundred thousand customers They're really adding that go-to-market motion, and we will let them run the developer go-to-market for all our products, because frankly, they're just so much better than Sanchez on that. And then the SMB market is basically message media. SMBs are business users. Think of a hairdresser on the corner who goes in online, signs up with a web page, but it's not a developer, right? It's a business user who use an online graphical user interface, basically. got 65,000 customers. So that's also an online go to market model, which message media is, is the leading leading player in the world. So really adding true competence as well on the go to market model on both of these acquisitions, which we're very happy about, and adding free, online, online, rapid go rapid customer acquisition go to market in two very important seconds. Right operator, slide number 12, message of people, We're leading, extending our strong position in the conversation messaging space with messenger people being one of the leaders in Europe. They're selling an integrated applications to mid-sized businesses, primarily focusing on the VP of customer care, which is a customer or persona segment that we have not focused on so much. And basically operating the customer care for medium-sized businesses in a more efficient way via WhatsApp, RCS, Viber, KakaoTalk, et cetera, right? In a very intricate way. It's like an online self-signup. You can sign up online if you will. You can test the product and see what it is. It's a really good and interesting experience which is growing significantly. All right. Integrations. uh tww wavy we closed the ww october 20 wavy in february 20. we're migrating customers and suppliers to our shared global platform as we speak on the supplier side we've gone pretty far and on the customer side we're almost midway and and that's happening as we speak and we're going through these projects and we have engineers and operations people and product managers on this progress right now and the goal is at the end to Shut down the platforms and reap the operational synergies from that. We're also having initiative to scale Wavis conversation messaging business, which is very large and leading in Latin America, in other regions with good results. ACL, we closed the deal in September 20. We have terminating the international traffic to India, leveraging the ACL direct connections. We have waited strategically to integrate the platforms because we think that can be done later. And there's so many specific things in India. So we have prioritized the WWE waiver over that. We waited for that in order to not do too much once. But we're then selling chat layer conversation API offered via WhatsApp in India to Indian customers via the ACL sales teams with good results. So really seeing the cross-sales there, even though we're prioritizing the platform integration on CWL, Devlin, Wavy before the ACL platform. SAP closed the deal in November. Sales teams are already merged. You cannot see the difference across 19 countries. And we mixed the leaders, picked the mix. So our Spain leader is from SDI. A lot of the account management leaders in the U.S. are from SDI, et cetera. And you have this mix all across, so it's fully integrated. We're migrating customers and suppliers onto our shared global platform with the aim of shutting the platform down as well. And the P2P messaging products for operators are aligned with Cinch Operate software offering and moved into that group from an operating control perspective. um scale up rapid increase as you can see going from 820 people to 3 800 4 000 over 18 months requires a scale up in core functions and that's what we're doing and it's all across various different areas operationally it is relatively undramatic we need to do it before the closing and obviously then we take a little bit too much cost now compared to compared to our EBITDA right now. But that will obviously, when we get the new EBITDA, be much lower in proportion to the EBITDA that we have then. And then we're also taking a little bit more cost now, which we don't need to take later, as we intend to kind of slow in the growth of the OpEx investments in this area going forward, because we've already taken the cost to scale to that level, right? So long-term, we're just seeing we're gonna grow OpEx in line with GP. But obviously in this type of situations, you need to take it a little bit upfront in order to handle the very, very rough scale. Then we're planning a set of integrations. We're having a set integration team with a leader coming in from Thomson Waters. She is used to handle, Thomson Waters did 40 acquisitions a year when she was there, right? So this is a let's say, an experienced person who really, really loves this, really loves every integration that comes in, and wants there to be more, which is a very positive thing, right? We're now doing integration planning with IntelliQuint, fined in February, expected to close in H2, the regular approval process is ongoing, and now we're doing integration planning with the teams in regular cadence meetings. We're not allowed and we're not doing integration execution before closing. Focusing a lot on cross-sales of voice and methodings to CIMS and Intelligent customers. And in principle, 100% of CIMS customers want voice and 100% of Intelligent customers want messaging. So I think that's a very good opportunity. MessageMedia signed in June, expected to close in H2, 21. We're happy to say that we just received the regulatory approval approvals for message media like we have asked before and we projected the q4 so now we just received them and and we're then obviously you know preparing for close um we're shifting uh the back end to cinch connectivity and then assessing joint growth opportunities they want a set of our products like chat layer conversation api etc integrating into them message people signed in september closed in first november And we're assessing integration options while also driving how can we drive their growth into other regions faster. Pathwire signed September 21, expected to close H221. Regular trial process is ongoing, and we're also doing integration process, getting a project here, getting the team, what are we going to do, who sells what, and identifying cross-sells opportunities. And here, there's also very large cross-sells opportunities I would say like 100% of the Cinch base is using email. There's not a business on the planet that is not using email in some form of communication. Or maybe there are a few, but very few. So in principle, 100% of our customer base have an email service and we obviously intend to cross them. 100% of IntelliQuint's customer base have an email service and we intend to cross them. And Pathwire is already sending text messages to their base. And they will add the voice offering as well. So very interesting and exciting cross-sell opportunities. Our sales teams are very, very excited. When we talk about the opportunities to them, they're almost drooling over the opportunities. And they're really saying, hey, I can sell that and I can sell this. And right now we're putting the structures in place in order to handle all of those cross-sell opportunities that we can. Revenue-wise or GP-wise, it's going to take a little while, a couple of quarters, because we're going to close in Q4, we're going to address the customers in Q1, Q2, and then the customers are going to sign the customers, and then you need to port the traffic, right? And that takes a quarter or two to port the traffic. So that's how it is, but we already have very strong signals from the cross-sells opportunities. All right, Roshan, financials.

Thank you, Oscar. Yeah, looking forward to close all of these transactions here in Q4, as communicated earlier, and happy to present some comments on the financials in this quarter. We start with page 16, which shows the gross profit bridge. As you know, a significant part of our revenues are paid as cost of goods sold to mobile operators. We pay them to send messages and place calls, but the rates they charge can vary differently between markets, and therefore we focus on gross profit as a key measure. Here you see, again, high growth rates in Q3 and Q4 2020 imply tough comparables for us, but we still have an organic growth rate of 20% for this quarter, which we are happy with. and then acquisitions on top of that contribute in 70%, and then we have effects reducing the growth by 4% to give you the total growth rate of about 86%. If you break this down into the segments, we have messaging growing at about 19% organically. We have voice and video growing at 40% organically, and then you have the operator segment And since we are only talking about the organic piece, it's the syringe-operated software business that's growing 16% organically. Inorganic growth contributions from SDI, 247 million SEK, WAVY 58 million SEK, and ACL 32 million SEK. Note that the ACL inorganic growth contribution is for the two months that they were not included in the base for 2020, since we closed that transaction in September of 2020. Moving on to page 17 on the income statement. Adjusted gross profit coming in at 896 million for the quarter, compared to 481 million last quarter. EBITDA coming in at 157 million for the quarter versus 215 million last quarter. Now, EBITDA is including acquisition costs, integration costs, costs for share-based incentive plans, as well as operational exchange rate gains and losses. Excluding these items, we report adjusted EBITDA of 298 million SEC versus 234 million tech for the same quarter last year, which implies a growth of 27%. On EBIT, we reported an EBIT of $25 million versus $155 million EBIT last year. Again, EBIT includes, in addition to the extraordinary items affecting EBITDA, also includes depreciation and amortization of acquisition-related intangible assets. Excluding those, adjusted EBIT was at 270 million for the quarter versus 219 million for the same quarter previous year. And then net financials are affected by currency transactions and currency hedging ahead of upcoming acquisitions where payment is due in US dollar and in Australian dollar. Moving on to the next page. where we try to reconcile cash flow with adjusted VDA. Here you see that adjusted VDA is then reduced by paid interest, paid taxes, and other items. Other items are primarily consisting of foreign exchange related transactions due to the large cash balances that we have in US dollar. And cash flow before changes in working capital amounted to $244 million for the quarter versus $145 million for the same quarter last year. Again, super happy with the strong cash flow generation in the underlying business at 82% for the quarter and 69% on a rolling 12-month basis. Moving on to the next page, page 19, you see the full cash flow statement. Again, the cash flow before changes in working capital coming in from the previous page at $244 million, which is then reduced by a change in working capital of $735 million. We have, of course, seasonal swings affecting working capital from quarter to quarter. In addition to that, as we have commented previously, the SDI business, which has come into the group, has had a negative working capital trend. development due to old balances related to pre-closing, which we are working through, but we still have some way to get through that. And for the quarter, we also have effects from a few operator-related contracts where we are prepaying operator charges in order to get both exclusivity as well as preferential terms into these operating networks. Now, this is something we have done quite often previously, and we have products that are quite unique in the market to give us these advantages with operators. But again, we don't see this as a frequently occurring kind of transaction, and especially at this scale. Right, on page 20 then you see a summary of the cash flow reclassification that we have done this quarter. We saw that in Q1 and Q2 in our cash flow reporting we had part of the financing for Wavy as well as the significant currency effects being recognized under operating activities and investing activities. We have now reclassified the financing for Wavy as a new share issue and also moved the significant currency effects down to the bottom part of the cash flow. We believe this reclassification now represents a better – gives a better understanding of the underlying development of our cash flows. And you can see here sort of the numbers for all the three quarters hopefully helping you in your analysis. Moving on to page 21, you see the financial targets. Our financial targets are unchanged. We want to grow adjusted EBITDA per share with 20% per year, and we want to keep net debt over adjusted EBITDA at under 3.5 times over time. Adjusted WDA per share grew 19% in Q3 2021, measured on a rolling 12-month basis. On a quarter-and-quarter basis, adjusted WDA per share reduced, related to the fact that we have completed share issues for the financing of acquisitions of IntelliQ and Pathwire and MessageMedia, whereas that adjusted WDA is not included in our reported figures. And that trend will then change as we go into Q4 and we consolidate IntelliQuent Pathwire and MessageMedia. Of course, those numbers will be included in our adjustability for Q4. On net debt, we have a reported net debt which is negative, which implies a cash position of 8.9x measured on a rolling 12-month basis. Moving on to the next page, on page 22, you see how that would translate on a pro forma basis if we completed all of the announced acquisitions, and essentially ending up at 2.8 times adjusted EBITDA, which would give us a net debt of, on a pro forma basis, of over 8.5 billion Swedish kronor. The updated financial target, which was announced earlier, so it's not updated as of this report, but updated earlier, is to maintain net debt to adjust the EBITDA under three and a half times. And that is what we continue to report here, even on a performer basis. And then finally, moving on to the last page, page 23, where you see the key financials and the key KPIs for The consolidated group, post-closing of the announced acquisitions of IntelliQuint, MessageMedia, and Pathwire, where we see that gross margin on a last 12-month reported basis with the announced acquisitions would be 34% instead of the reported 24%, and adjusted EBDA margin would be on a combined basis 15% instead of the reported 9%. In the table on the, or the graph on the right, we also represent then how our gross profit mix would change, where on a reported basis today, we have 83% of our gross profit coming from messaging, a small part from voice and video, and then 12% from the operator segment. If we had included the announced acquisitions, we would have 52% of our gross profit coming from messaging, 15% from voice and video, 12% from email, and then 19% from operators. So, a much more diversified gross profit mix as a result of the announced acquisitions. That being said, I'd like to hand over to Oskar for final closing comment.

Thank you, Roshan. So, from our perspective, we do believe that we see a very strong position created by our continued organic growth plus these acquisitions. We feel that all of these have turned out very well. We're super happy and we think we are getting a very strong position in a very attractive market. Number two, we do see, I mean, on the gross profit growth, it's been a big discussion, of course, today. We see no underlying change or structural change in the business. we see that quarters sometimes come in a little bit higher, like last quarter, sometimes come in a little bit lower, like this quarter. It has its reasons, like we have explained, with the operators raising prices in a specific quarter or big customers renegotiating volume binding in a specific quarter on some mixed effects. But there's no underlying structural change in our trajectory as we see it. It is obviously hard to always plan exactly what happens in a specific quarter, basically. But we're confident of our market position. We're very confident of our market position and very confident about the market and our growth, continuing our growth agenda with a strong organic growth. And that's truly how we see it operationally. And we are very happy to see the very strong market that we're in. It's a market that's really turning where enterprises are increasingly wanting to talk to us, not only about their messaging needs, not only about their email needs, but they want to talk to us about how we engage with customers, how to reduce their churn, how to reduce their customer care costs. So we're getting one layer up and a much more strategic discussions with a lot of the enterprises. And that's, I think it's a very, very interesting trend going forward of us supplying, becoming more strategic partner, but also supplying a lot more software and SaaS services on top of the high volume transaction volumes. That said, thanks a lot for your interest. And I'll leave it back to Thomas.

Thank you very much, Oskar. Thank you, Roshan and operator. May we have the first question, please?

Thank you, sir. Just a reminder, to ask a question, please press star 1 on your telephone. To cancel the request, you may press the hash key. Please limit your questions to one per participant. Your first question comes from the line of Fredrag Savinovic of Carnegie. Your line is now open.

Thank you, operator. Thank you for taking my questions. This is on the pricing dynamic. So from a competitive standpoint, you mentioned in the report, it's a fierce market, but we're happy to hear more comments on that. But we know this is a scale game, of course. We know Cinch has the highest scale when it comes to messages terminated. We know their US peers that started a high gross margin feels unlikely that they want to combat you on core customers with lower prices. And there's lower or certain European players which are quite insignificant players compared to you in size. So wondering on the pricing side, are you proactive towards your key accounts? Or what is it about? Or is there something happening new on the price side? So really reasoning on why you offer this to your key accounts.

I think it's a very natural thing. When accounts grow as much as they do, and when you are the biggest brand in the world, you often sometimes say, hey, I have tripled my volumes over the last three years, or I have doubled my volumes, and then you start to go, can I get a better price? And I think that's prudent to do so. It's not so that the gross profit is shrinking. But when you buy at scale at this volume, then I think it's a very natural thing, right? Of course, we also see, I mean, these accounts are the biggest brands in the world. It's not like It's not like any of the competitors don't know about them. So at all times, our competitors are always trying to get into them, right? That's also how it is. And then we try to be proactive, but not afraid, but also knowing our quality and valuing our quality, right? But we also, at some point, it's very proactive. We can't only react, so we're also proactive and taking the steps that we think is to get to a reasonable and balanced price level.

All right. All right. Thank you. And one on operator costs and the pre-buying of traffic and the working capital impact. In you doing this and pre-buying, does that imply that you expect more hikes going forward or what do you think on the carrier side for the coming quarters?

I mean, and I think firstly, you know, what we have to say is, I mean, we have a wide operating network, right? I mean, I think at last count, we had more than 450 operators that we are directly connected with. Now we're talking about a few selected ones where we have the opportunity. you know, to various technical and financial solutions, you know, get better terms. And then we use our size and our position to actually obtain that. This is by far not yet a widespread phenomenon. And I think it's difficult to draw from these individual deals any kind of broad plans on operator price changes across all of our connectivity kind of portfolio. All right.

And just one final in your reasoning, long-term.

We'll have to go back to the end of the queue. We have a lot of participants. Sorry, operator. Thank you.

Thank you. Once again, just a quick reminder, please limit your questions to one per participant. Your next question comes from the line of Daniel Torsen of AVG. Your line is now open.

Yes, thank you very much. I have a question regarding FBI. It seems like they have been growing sales slightly over the one and a half years since you acquired it, while it declined around 8% on gross profit. Can we get a feeling for the current organic gross profit run rate in SDI, as it will have a dilutive effect on organic growth in the coming quarters?

Yeah, I think just a very brief comment. I mean, you know, in a way continuing what I've said, what we've said previously. If you look at the SDI business, we report, you know, we've reported that in three segments. We have the A2P messaging reported as part of the messaging segment. We have the operator interconnect P2P business reported as part of the operator segment. And then we have the contact center business reported in the other segment. From a current trends perspective, what you can see in Q3 and a little bit of that in Q2 is that we have a good development on the operator interconnect side. That business is developing to our satisfaction. I think it's still time to see if that is a long-term trend. We're obviously working to make that a long-term trend. On the A2P messaging side, we said that business grows around 10%-ish when we announced the transaction. What happened between signing and closing is that the growth actually declined in the A2P messaging side, and that, without speculating, may have to do with the lack of attention during that period from the SAP group on this business, etc., uh uh and what our focus has been uh is to get that trend uh you know up and and really you know we what we can see in terms of the underlying uh customer communications and and uh discussions that we are having with the customers is that there is no reason for us to believe that it should not grow um at the same rate as our organic growth um you know but it's going to take us a bit of time to get there Right now, I would say, you know, that it is still weak compared to what we said at the time of timing. And I think that's sort of where it is currently. Oscar?

Yeah, I think it's weak but improving, right? We see good trends. We're doing the things we are doing. And we see that traction taking effect. And the things are very concrete. It's like, okay, SDI didn't have any new salespeople. If you don't have any new salespeople on your base, you're not going to grow as much, right? They didn't work as much on the account management side and didn't have any significant marketing standards. It's a very concrete thing to improve in other areas. We implement them. We see the effect, but it's not at full scale yet.

I see. I see. Thank you. Thank you very much. Next question, please.

Thank you. Your next question comes from the line of Frederik Stankiel of Nordea. Your line is now open.

Hi, good afternoon. So back to the question about sort of carrier fees and price pressure. Just if we think about the organic sales growth for messaging was 35% and gross profit was 19%. That discrepancy there, is that, could you comment anything about the split sort of between higher carrier fees and how much is sort of GP value capture that goes from you to the customer, if you understand my question.

Thomas here, I think you're trying to break down the discrepancy between the growth rate of organic revenue and organic gross profit, where we've said the larger part is carrier pass-through fees, which will annualize after four quarters and sort of drive up revenue growth during that time without really affecting gross profit, right? Then you have a knock-on effect that you might not be able at every single point in time to pass that cost on to every customer immediately, at which point you will actually see a detriment to gross profit, even if the largest part is more a dilution of margin than impacting gross profit. Then the second big aspect, of course, as you alluded to, is where we've renegotiate our volume bands of pricing for incremental traffic on larger customers. The carrier possibility is the larger part, but the other one is a key factor too. And that, of course, brings some optimism as you annualize that in the beginning of 2022. Okay.

Thank you.

Thank you. Your next question comes from the line of Stefan Goffin of DMV. Your line is now open.

Yes. Could I first just follow up on the previous question? The volume discounts, I mean, that is, I guess, a regular part of the business, but is that sort of something that you do on an annual basis with these customers or do they happen once in a while? I mean, will you benefit from the larger volumes you're seeing now driven by these volume discounts for a period? And then just a question on the the cash flow impact from the prepaid mobile operated traffic tariffs. Is this expected to bounce back as you use volumes on this contract? And are you actually taking any risk relating to volumes?

Right, so if we start off with the price negotiation, there's not a particular cycle, but when you work with some of the world's largest companies, you have a continuous dialogue and reassess, right? So there's no particular timeline. I think why you're seeing this perhaps a bit more pronounced now in Q3 and Q4 is to recognize where we were 12 months ago. where we were quite open that the majority of our growth in absolute terms were generated by a subset of our customers, our very largest customers. We also said in the beginning of this year and we said throughout this year that we're increasingly seeing a broader-based growth. Now, when you look at the comparables and you look at the impact year-on-year, recognizing that a large part, an outside part, of the growth contribution came from these customers one year back, and it's exactly those customers where we have started some new pricing. That's why you get a little bit of unpronounced effect in Q3 and Q4. Of course, as we broaden our growth, that type of concentration decreases, and we already see that. It's a little bit special with this one or two quarters based on the concentration we had one year back. But both on the organic side, that's changing, and even more so with the expired agenda, of course, there's a greater breadth of the business. Then on the other question, Roshan.

Yeah, I can try to answer that. Obviously, when we do these transactions, we have a number of risks, obviously, that we try to mitigate and manage. I mean, we have obviously clauses in the contract that could protect us, for example, in certain types of post-missure situations or in a tech shift situation, etc. You know, we also, I think in the case of these contracts very often, and I think, you know, at least talking about the transactions for this quarter, you know, in all of these cases, actually put in software solutions in terms of a firewall at the operator that makes sure that we can secure that all of the traffic is ending up with us and, you know, that there are no ways around it. But at the end of the day, yes, there is a certain volume commitment that we make, and here we rely on our long expertise. Many of these are repating customers with us also, so we have a good insight into the history of the traffic. But there is an underlying volume risk that is inherent in these kinds of transactions.

Yeah, there is. But also that we think, obviously, making this transaction, we think the risk is very manageable, right? This is made by our longest-standing experts being 25-year messaging veterans having seen this many, many, many times, right? So we think the risk is very manageable. But yes, there are risks in certain types of deals, and this is one of them. But we think it's very manageable.

And then relating to the cash flow impact, should we see this coming back after use of the volumes?

Yeah, I mean, I missed to answer on that. I mean, that can vary a little bit, you know, depending on the clauses in the specific context. it does come back over the lifetime of the contract, whether it comes down evenly over the lifetime of the contract, sometimes towards more tilted towards the beginning and sometimes more tilted towards the end. That is really an individual contract decision. But yes, it comes back over the lifetime of the contract.

Okay. Thank you. Thank you.

Thank you. Your next question comes from the line of Daniel Yorberg of Handels Banking. Your line is now open.

Thank you, operator. Yes, two questions. You might touch upon this, but again on the volume discounts. Is this only part of the big U.S. tech companies or only a few of them? And also, is it impacting the full quarter or is it just part of the quarter? I will see... similar Q4 will be you know increasing before eating out so to say and also comment on how large part of the messaging revenue that came from this US big tech in Q3 versus one year back thank you thank you Daniel we got a very poor line but I believe you asked about you know how many of the of our larger customers you know were renegotiating prices Oscar So that was the first part. Subset of the large customers. This is not a regular event. We have regular weekly, daily meetings with these customers, right? It's very, very large customers and very large buyers. No, it's not all of them. It's a subset. And it's not regular, right? It's very large deals. The second and the coming two questions you had was for I think the second part of the messaging revenue that came out from the U.S. big tech in the quarter.

We haven't disclosed that figure.

Okay, may I ask you about Sweden? It was not your focus market. I feel it was quite locked down year over year, especially messaging. And is there actually an impact of more of market share or anything else that we should be aware of?

Daniel, I can take that one. We have customers that have invoicing addresses in different countries. And we essentially base that, you know, that information on the customer's invoicing address. And really what has happened in that specific case is that we have large customers that have moved invoicing addresses, which means that revenue has moved, you know, moved between sort of jurisdictions in that reporting. And that can happen from time to time, you know, in that report.

Perfect. Thank you for that clarification. Good luck with your report.

Thank you.

Thank you. Your next question comes from the line of Andreas Jolson of Danske Bank. Your line is now open.

Yes. Good afternoon. Just curious about these sort of scale capturing investments. For how long will they last? And then secondly, what about M&A ahead? How do you see that in terms of size and perhaps timing also with regards to the integration work that you do now?

I can maybe start just with a brief comment on the first question and then I'll hand over to Oskar to elaborate further and answer the M&A question. I think what we've said previously is that we see that the ramp up that we've seen in previous quarters of the costs will decelerate, and I think that we're happy to see in the Q3 numbers that that's the case. Then I think when you look at these scale investments, some of the investments that we're making is just needed by the fast growth of the business. We've gone from 800 people to more than 3,500 people. And the ERP that we chose to operate the business on when we were 800 may not be the ERP that we choose to operate the business on when we're 4,000 people. So I think we have to look at these decisions in the context of where we are at every point in time. But with that being said, Oscar?

Yeah, so yeah, we're taking them now and then scaling them off as we bring in these companies, right? And we do think we take a little bit too much cost now, to be honest, but we just have to handle the extreme growth, right? And we see that, okay, we're not efficient in all functions. We need to overstaff a little bit. We need to bring in consultants, et cetera, because it just goes so fast. And there are plenty of opportunities to optimize that going forward. but what we just need to handle the growth and right now it's more important to close these transactions than to optimize growth in in these two quarters right yeah so that's very clear and long term again we plan to grow topics in line with with with the gp there's no questions all right and on your second question how do we see the opportunities for for for further m a and uh Q4 is obviously a very busy quarter, I would say. We may not do close four large or three large and one small transactions every quarter, or we will not, but we do see, and obviously we need to time all M&A to our ability to integrate and ability to handle it very, very clearly, and we're very cautious and conscious about that. But a little bit more in the long term, we do see a continued consolidation, we do see a very attractive pipe of incoming M&A opportunities going forward. And there is no change in our M&A strategy going forward. We will, for the coming quarters and years, you know, we project to continue to grow organically and via M&A during this very intense consolidation phase of this market. And I think that's very beneficial to us as a company, our customers, and our shareholders going forward as well.

Perfect, thank you. Operator, do we have a final question?

Yes, sir. It's from the line of Ramil Korya of SEB. Your line is now open.

Yeah, thank you, operator. Just a bunch of follow-ups, I guess. But looking at the gross margin, I guess everything you're seeing, everything you're saying points to Q3 being the trough. And I guess sort of US messaging revenues, Q3 was actually lower than Q2, which is the first time we see a sequential decrease since 2019. You're saying that you're seeing a broad-based growth, et cetera, et cetera. And then if you remove these acquisitions coming in with structurally higher gross margins, is there anything that sort of points to Q4 being in line with Q3 or even worse off gross margin-wise?

You know, I can try to start off there. You know, I think, as we said, Ramil, I mean, on the gross margin front, we have a number of different effects. I mean, if you look at the mix effect obviously placed in, and that's a bit difficult for us, you know, to specifically, you know, kind of give any commentary around. That can vary a lot from quarter to quarter. On the operator price increases, you know, what we essentially see is that where we have bundled customer offering, including the operator price and our gross profit, it does take a bit of time for us to analyze that customer by customer and work with customer pricing to increase margins. So that is something that is not just a one quarter effect, but it can take a couple of quarters to three quarters to kind of work that back up again. And again, on the volume discounts, what we've said, that's at least a four-quarter effect in terms of when it starts to play back. Now, that being said, Q4 is also a seasonally strong quarter, has been historically. I think it will be interesting to see with all the news flows around sort of component shortfalls and delivery challenges around the world, how we see our our volumes play out during Q4 here, but I mean, there is definitely a seasonal effect during Q4 which will play positively for us.

Okay, okay. Just a clarification there, sorry, Oscar. I mean, these price hikes from operators, that was two quarters ago, if I'm not completely mistaken, or at least in Q2. Have you started to push them out towards customers?

Yes, we have, but there have been continued price increases over multiple quarters, starting with one, and then the other operators follow, right? So it's been continued in the market, right? The one operator does it, then the others feel they can do it as well. So it's continued, and I may not say longer than we expected, but continued longer than the first time we reported it, and then we reported again, right?

and then we have started you know doing price increases on the first ones but then then obviously not on on the other ones right um but actively working on that um um this is not a new phenomenon as such right it's just that occasionally it gets a little bit lumpy so we don't want to you know exaggerate any at least any trends this is you know, relatively business as usual from our point.

Yeah, and I think we have like 700 price changes from operators in the first part of the year or something. So this happens all the time. It's part of our business. It's happened every year. But sometimes it's individual quarters, right? But again, this is not nothing new. It's hitting individual quarters. But, you know, to get back to your question, there's no change in the underlying structural growth of this industry. We see no recent and no intent or, you know, we continue to drive for the same growth levels that we have seen, that we have seen, you know, historically and then trying, you know, so there's no underlying change in that trend, but things hit individual quarters a little bit differently. That's kind of, I think, the underlying bottom line. We do see two trends in the market and on the positive side, increased customer demand for a lot of new things and extremely active market, and we also saw increased competition, right? And I think these two are evening out a little bit, right? It's a tough market, but it's a very, very high growth and very, very attractive market on the other hand, right? So no underlying change in underlying projections or from our perspective or what we believe in historic growth rate.

I think you just round that off on, you know, since your question was really, you know, quite near-term focus. You've got to separate out the near-term effect happening with comparables in Q3 and even tougher in Q4, the impact of SDI coming in, you know, the price changes that we pushed through to some larger customers, which were in the beginning of 2022 and will have an effect also on Q4. You know, all of these things have, you know, an intermittent impact on the second half of this year, whereas you know, when you take, you know, a slightly longer view, recognize that we're closing four important transactions during Q4, which will, you know, transform our P&L. And, you know, we will have, you know, multiple mixed effects, including, you know, higher gross margin, higher adjusted EBITDA, you know, starting already from, you know, from Q4, we will begin to see those mixed effects. And as we go into next year, And again, reiterating what Oscar said, we're starting to see the multi-year initiatives in broader growth pay off, right? We're not getting that payoff in Q3 and Q4, but a little bit of a rough patch, this type of quarter, it doesn't change our fundamental view of the market we operate in.

Okay, that's clear. A final one, if I may, just on the ATP monetization deal here. I mean, last presentation, I think you spoke about the turnkey customer engagement market going by above, was it, 25%. These type of deals, should they incrementally add to your sort of ability to take market shares, or is this sort of you being defensive, for lack of a better word?

No, this is the growth driver. I mean, we wouldn't make these type of deals if you don't see a very good business opportunity, right? You don't spend this type of cash if you don't. to see a really good deal. So this is a growth driver in short, which we're just saying, all right, great. This we make because we can increase growth.

That's clear. Thank you.

Thank you. That'll have to be our last question. Thank you very much.

Thank you all for your interest.

Thank you very much.

Thank you very much. And that does conclude our conference for today. Thank you for participating. You may all disconnect. And speakers, please stand by.