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.