Sinch AB (publ)

Good day and thank you for standing by and welcome to the year-end report 2021. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you need to press star and one on your telephone or you can also submit your questions via the web. We do ask that you please limit your questions to one to two questions at a time. Please be advised today's conference is being recorded and if you need any further assistance please press star zero. I'd like to hand the conference over to your speaker today. That's Thomas Heath. Please go ahead.

Thank you very much, operator. Warmly welcome, everyone, to the Finch Q4 2021 conference call. My name is Thomas Heath. I'm Chief Strategy Officer and Head of Investor Relations. And with me as presenters today, we have our CEO, Oskar Werner, and our CFO, Roshan Saldana. And with those introductory remarks, I'd like to hand the word over to Oskar.

Thank you, Thomas. And thanks for everyone listening for the interest in Cinch. So without further ado, let's move into the slides. So operator, if you go to slide number two, please. So this is a, as you know, a transformative quarter for us with closing three large and one small acquisitions at the tail end of the quarter. We're very happy to close all of these acquisitions, and we think it puts us in a very strong position going forward. So on net sales, past 12 months, up to 16.2. The adjusted EBITDA being, past 12 months, 1.3 billion. We are now 4,000 or a little bit above people, 62 countries. And we're a global leader and truly a global leader in cloud communications and mobile customer engagement. We now have over 150,000 customers, adding the strong customer basis from both Pathwire with strong developer go-to-market and MessageMedia with a strong SMB go-to-market. We're a scalable cloud communication platform for messaging, email, voice, and video, and we can say we're a true leader in all the three parts of those. We do more than 600 billion engagements per year. if we count the messages, the email, and the voice calls on the number of calls. And mind you, if you count this, if you do an average on the number of touch mobile phones on the planet, we touch every single mobile phone on the planet roughly 80 times per year. So on average, touching every single mobile phone 80 times a year on average. That's a really strong statistic, and I think it shows how strong this market is. This is really a market which is in between communication between every single consumer and every single enterprise or business on the planet. We also serve eight out of ten large US tech companies, and we have been profitable since our foundation, and we continue on that track to drive a strong and profitable business. Operator, if you go to the next slide, please. Really significant for this quarter. I mean, the biggest event is closing these transactions and really us transforming into a global leader. If you look at the Gartner approach, major vendors within CPaaS, they would put us, Twilio, and Infobip as the mega providers in this business. Then there are a set of smaller ones. You can probably go into a couple of regions and add a couple of names there, and then there are smaller people being, you know, hundreds of them, local or regional competitors, which there are quite a lot. Mind you, this is a very, very large market. We believe that being one of the top two providers in this market really puts us in very strong positions with the world's largest enterprises. We believe offering global SIPA services across all channels at scale, at the global level, with a unified application or SaaS layer on top, two global enterprises will be, you know, few players that can actually take that position. And right now, we're definitely, you know, one of the, you know, very few that can actually do that, and we're happy with that. You can also see this in our gross profit and golden product mix. In 2020, we did 2.1 billion gross profit in SEAC. 2021, some 4 billion, and 2021 pro forma is close to 8 billion SEAC, basically. You can also see the You can also see the diversification of our business being on the performer basis, 11% on the SMB side, 11% on email, 32% on voice, and then 46% on the messaging, including our applications business. So you see, and all of these businesses are strong and profitable and growing in their own right. So you can see a strong diversification, and you see both on the gross profit and the growth side, but also on the profit mix. And we're very, very happy with the position we have taken into this market. That said, operator, go into the next slide, please. Then if we jump into the shorter term, that was the kind of the long-term really strategic position we'll take. If we're talking into the shorter term, looking at the fourth quarter, Again, we've strengthened the position as a global leader in CPAS. Net sales growing 74%, growth profit 69%, adjusted EBITDA at 25%, adjusted EBITDA 475 million, and operating cash flow of 462 million for this quarter. Transformative acquisitions, positioning things as a leading profitable CPAS company. and a full year pro forma of 23.1 billion and a GP of 7.7. I think that's a very strong position we have taken. Now Q4, we have a set of factors affecting organic growth. First, we should all know it's a strong comparison quarter. We had a really strong quarter last year in this. So the comparison between Q4 2020 is strong. And that's both on the gross profit level and it's on the adjusted VDA level since we were holding OPEX in order to be safe side on the COVID effects. So we were holding OPEX in the middle of the year. Therefore, we have a lower comparable OPEX growth rate in that quarter, basically. So both strong on EBITDA and gross profit. The other big factor affecting organic growth in this quarter on the gross profit side is we had a minimum commitment to one multinational mobile operator where you commit to a certain set of volume in order to get a certain set of price. A couple of things turned bad in this deal. So we had a lower traffic volume and this had a 34 million or 34 million negative effect on gross profit in Q4. That's around about a five percentage point in growth if we would not have had this deal. This is a one deal and it's a time bound deal. We believe we have reserved all the negative effects for this deal in this quarter, but it's obviously hard to know exactly. In any case, this deal is ending in June of 2022. Doing this type of deal is a small part of our business. Sometimes you do it when you see a good opportunity. We believe this was a good opportunity, but it obviously turned the wrong way for us. We have seen very few of those mistakes earlier, but in this quarter we did. We had another effect in this specific quarter, which is a bad debt relating to one customer adding 37 million to OpEx in Q4. This is another one of this. We have been good in managing bad debt and historically have had very low bad debt numbers. In this quarter, we had a significant bad debt and we reserved 37 million for that in order to account for that. Also, one of these one-offs, which we have not seen before in this quarter, one of those customers slipped through, affecting this quarter's performance. We also do see in the market the effect of competition, and we had, as we previously communicated, price adjustments to larger customers as a result of this strong market competition. We believe we, in general, stand strong. This is a market with competition. very high economies of scales. We have the largest volumes and have very large economies of scales. This quarter we have, as you've seen, we have had high revenue growth but lower gross profit growth. So keeping market share but being lower on the gross profit growth side as a result to the competition in the market. This is something we're going to look at going forward on how do we keep gross profit growth at a good level. Focus areas for 2022. First, capitalizing on the strong market position to drive growth. We have a very strong position and large cross-sell opportunities. In principle, every single messaging customers we have have an email provider and really doing cross-sell there. Same thing on the email side. They also use messaging in various forms. Same thing on the voice side. How can we cross-sell all of these different customer bases? And how can we utilize our joint offering in order to really be a more full-service provider to the largest enterprises? That's something we're very positive about and looking forward to. Obviously, and needless to say, we also do need to do cost control in messaging and group functions to ensure that costs do not grow faster than gross profit. And we have a strategy of growing OPEX in line with gross profit. Now, in this quarter, it's sometimes hard to time exactly, you know, how will the gross profit and OPEX look or how it's OPEX you can time, but gross profit is a little bit harder to time. So, therefore, we have a little bit of a mismatch between OPEX and gross profit growth in this quarter, and that's something we will adjust going forward in our messaging business and in our growth in our group functions going forward. Obviously, in this quarter, it's always hard. I mean, we're doing a large scale-up, so it was a little bit of a special quarter where we had to take costs in order to make sure we close these transactions and get them in in a set of group functions. So, It's a tough quarter to keep OPEX at a reasonable level when you're actually doubling the business in the same quarter. But needless to say, we have strong focus on that going forward. Then we also have a new operating model with full P&L responsibility for the business unit's precedence, which we believe will drive a lot of cost consciousness. But we're also very happy on being able to operate the business into five business units that can fire on, going from firing on one cylinder to basically firing on five cylinders with leaders of each one of them. Operator, if you go to the next slide, please. On the gross profit side, if we break that down, so as you see, Q420, and then we had an organic growth of 5%. And then you see the various factors of acquisitions moving up to the 69% total gross profit growth for the quarter. And you see the buckets they fall into. Again, like we said, Q4 tough comparables to Q4 2021 is one of the reasons. The other one is the minimum commitment to this one global mobile operator. It's a time-bound thing. We think we have reserved everything, but the contract is actually ending in June 2022. Without that, we would have had a 5% more gross profit goal, so being at 10%. The third thing we talked about is we have had high price increases in Brazil and India. We have been unable to pass those on to customers immediately. That has an effect on the gross profit level since we have a lower gross profit per message in those markets right now. It also has an effect of if an operator is increasing prices with 30%, even if we get back to the same gross profit level on an absolute gross profit per message, then the percentage gross margin will be a little bit lower, which is important to remember, even though the business is just as sound as it was before. Price adjustments we talked about, continuing to lower margins. We will work on this going forward, both in working with the targets on the sales teams, how much are they prioritizing top-line growth versus gross profit growth and gross margin keeping. That's one thing. Working on the cost level with various operators is obviously another. And the third big area, which we think is very strong going forward over time, is working on a customer level, upselling the customers to more software services, other services. Since we now have a very broad portfolio in the group, we see good opportunities for increasing gross margin on a per-customer basis by just adding more services to each customer. Taking that account, you would have had a 10% underlying GDP growth in local currencies, excluding the impact of pre-commitments. Operator, go to the next slide, please. OPEX, looking at OPEX, it's a little bit hard when you look at the trends because there are so many things happening when you drive a company at this, you know, very high growth level, including acquisitions. So if we start at the left, we had 480 million OPEX Q4 as reported. Now that only took in, when we closed SDI in that quarter, it didn't take in the full OPEX run rate or SDI since we only closed it for a set of the weeks there. If you would have had SDI into the OPEX in the entire quarter, just taking the actual OPEX for the entire quarter, the OPEX would be 524%. Then going into Q4, you add other acquisitions. Coming in there is primarily Wavy and the yellow bar there, so you can see the growth in that. And you see the OPEX growth from Q1, Q2 to Q3. And then you see Q4 adding a part of the OPEX from the new transactions in the yellow bar, only a set of the month there. All of the yellow bars are obviously combined with gross profit additions as well. And then looking at the green bar, so growing really from 524 to 649, which includes the 37 million bad debt. If you would exclude the 37 million, since we typically have low bad debt, the underlying OPEX growth would grow with around about 17%. And the 17% is obviously, as you see, a mismatch versus the GP growth. That one we did correct. It also has an impact from The scale-up, of course, remember that we are actually doubling the business in Q4. In order to take in those transactions, we have added quite a bit of OPEX in order to scale group functions to be able to handle it. All of that OPEX in Q4 is weighing the messaging business, even though it's actually related to acquisitions because we hadn't closed the acquisitions in Q4. So that's a little bit unfair, if you will, to the messaging business. Had we not doubled the business, we would not have grown the size of Group Function in this way because we wouldn't have had the need to, of course. Again, if we go in the commentary, we also had a slower OPEX growth in 2020 Q4 due to the COVID outbreak and being cautious there. That's one of the factors. We have increased OPEX space in 2021 on a run rate basis due to sales and product niches. for the large acquisitions, and then obviously businesses. Yeah, we had the 37 million impact. So that's if you see the OPEX growth. But 17% on the live OPEX growth, including the scale-up, and then now we need to time OPEX to gross profit as our strategy is to grow those in line. Talking about that, we should think about we have several different business units. We're talking about the messaging business with the central functions, which is where we think we have a mismatch. In the other business units, they may grow faster or slower, and we time the OPEX growth to gross profit growth in those individual units going forward. So we need to see that as a business unit model. All right. If we then, operator, go to the next slide, looking at the new incoming acquisitions and just Orient you on the scale and what they are doing. So IntelliQuint transaction closed 9th of December. Adjusted EBITDA in Q4 is 325 million SEK, implying a 26% margin. So, very, very strong diversification, very strong and stable profit engine to Cinch Group. And we are very happy with this diversification, both from a financial perspective, because I think it really gives us a strong base with a very strong profit engine, which is good, especially in these times. It also very good to add the largest voice network in the U.S. to the group and being able to cross-sell and up-sell and drive the growth on the voice side as well. So these two things we're super happy with. IntelliQuant had a 7% organic net sales growth and a 7% organic gross profit growth in local currencies for year 21. Looking at IntelliQuent, they have a healthy underlying growth driven by enterprise demand for programmable voice. So look at the segments driving that. It has a good, solid growth. You should also understand here that COVID impact on IntelliQuent is relatively large. When COVID hit, they had a 30% roundabout increase in traffic volumes over one week. Then that has gradually tailed off to maybe be 10% of that level. So growth levels in IntelliQuint is kind of a little bit distorted by a COVID hike in 19 and 20. So that's why you see definitely an impact on that. We also have a regulatory reform on 8YY number and 8YY what we mean by that basically calling 1-800 numbers with the largest providers of 1-800 providers in the US. So there's a regulatory reform which basically means the money IntelliQuint makes for each call on an 8YY number is a little bit less than it was before. So basically, just the revenue per transaction is going down after this regulatory reform. This is something we knew when making acquisitions. We calculated that into the purchase price, et cetera, so no news to us. But obviously, that will tail off and make the revenue per transaction a little bit lower, which will impact gross profit growth on a reported basis in IntelliQuint going forward. Still very happy with the business. We knew it when we acquired it. Still a very, very strong profit machine, but it will show a little bit lower growth than it would have done without these impacts on the reported basis. Method Media, a transaction closed 5th of November, adjusted EBITDA of 100 million in Q421, implying a 26% margin. 25% organic net sales growth and 28% organic gross profit growth in local currencies in full year 21. So very strong and solid-found business with a diversified customer base, running about 65,000 customers, 7,000 new customers starting to use the web-based product in Q4 21. This is a business which basically sells a subscription-based services, you know, paying to the local hairdresser signing up using the Venn-based tool, paying 100 euros a month, 200 euros a month, 500 euros a month, something like that. So, you know, driven by a lot of customer acquisitions online, signing up online with a very diversified customer base. I think this is a very strong, very happy with the growth and very happy with the profit engine, also diversifying base and giving us a strong online web-based go-to-market to the SMB space, which we believe can continue to grow for a large number of years going forward. And message media has also started integration with the Cinch Conversation API. They basically sell a subscription-based service of the web tool. Primarily the channel they use today is messaging, but they see great opportunities of adding both conversation API, conversation messaging, and email and voice to these services underlying and then increasing the revenue they can take the customer. Pathwire, another very strong acquisitions. Transaction closed 7th of December. Adjustability in Q421 of 113 million SEIC, implying a 37% margin. at a 32% organic net sales growth and a 30% organic gross profit growth in local currencies in full year 21. This is a high velocity developer go-to-market, over 100,000 paying customers, so also a good diversification. The strongest, we believe, email developer go-to-market machine that there is. And so in this area, looking at us versus Twilio, We definitely rival or in the Pathwire teams, you actually think are very strong on the developer model versus even a Twilio on the email side. So adding that muscle to our business is very, very strong. We also are very happy to hear to see a strong early stage pipeline of cross-sales to Cinch customers. We have closed the first cross-sale transaction and we have a strong pipeline already only a month or two after the acquisitions of good sized customers that also want to consume email. If you look at it, we believe 100% of our messaging customers have an email provider and we think we have a good opportunity of addressing that base with the Pathwire offering. How this is made is very concrete. Basically, making a list of 100 customers on the same side, we open the door, and then we bring in the Pathwire team in order to sell to those Pathwire experts on email in order to sell to those customers. And we do the same thing on the other way. We open, you know, making a list of the 100, you know, most attractive Pathwire customers, and we open up the door from the Pathwire account manager and bring in the sales messaging experts and cross-selling. So doing that, continuing to do that and seeing the strong traction, very happy with. I will do that with email and voice and the SMB side as well. So very strong. Also happy to see that when we pitch Pathfire to our biggest customers, their offering versus existing providers stands strong. Many of our customers are very impressed by the functionality and the scalability of the platform. So that's a verification of our theory of this being a very strong email product in the market, which we think will drive good growth going forward. On the operating model side, if we go to the next slide, operator, please, this is slide 10. We have decided to, as previously communicated, run the business out of five business units with strong business units presidents running a full P&L of all of them. We have enterprise and messaging, which is our messaging business and the majority of the enterprise go-to-market. All our regional teams sit in here. So you think about like 80% of the enterprise go-to-market sitting in that. The voice business unit running the voice product and a voice-dedicated specialist sales onto the enterprise side, or onto the voice side. Developer and email has a responsibility for the email product also, obviously, but also the developer go-to-market for all Cinch products, across all products. Applications, this is a SaaS business. Basically, all the applications on top of the channels, So chat layer, message to people, synch for marketing. So you want to sell a SaaS service on top. This is the unit that has responsibility for driving that. And then we have the SMB unit basically being the message media business. You can see enterprise and messaging being 46% of performer gross profit, 23% gross margin, 17% GP growth. Here we're actually much for the numbers in the report, excluding ACL and India, but, you know, those are the easiest numbers to compare to on an objective basis, basically. The voice side being 32% of Performa gross profit, 46% gross margin, and a 7% GP growth. Developer Nebel, 11%, and 77% gross margin, and a 30% GP growth in 2021. Applications is currently included in enterprise and messaging, and we're working on getting those P&Ls well and then going on to being clear on the splitting between those. And the S&V being 11% of performer gross profit, 62% gross margin, and a 28% GDP growth for 2021. Looking at things, I think it's very important that you look at it at these different units going forward, a very diverse side, very strong business with a lot of legs to stand on, but also a lot of cooperation and ability to work together with these and cross-sell of each other's products to the other customer bases. And it's a strong, strong opportunity going forward. That said, and in order to leave time for questions, I will not go through the details of the 2022 focus. You can read that after your lecture, but I will leave the word to Roshan to go through a little bit more details on the financials.