Sinch AB (publ)

My name is Thomas Heath, Chief Strategy Officer and Head of Investor Relations at Cinch AB. Together with me today are CEO Oscar Werner, our CFO Roshan Saldana, and our Investor Relations Director Ola Elmeland. We'll run through a presentation and then take questions from analysts. Please limit yourselves to two questions at the maximum and we'll loop you back to the end of the queue. With those first introductory remarks and a warm welcome to everyone on the call, I'll hand the word over to our CEO, Oscar. Thank you, Thomas. Great to speak to you all, and thank you for your interest. So welcome to this Q1 presentation from Cinch. As operator, can I go to slide two, please? So we had a SEK 19.4 billion net sales in the past five months, adjusted EBITDA of 1.8 billion, 4,000 people roundabouts, And truly, truly now in this quarters being positioned as one of the absolute top global leaders in the cloud communications and mobile customer engagements. I think that's a very strong position in a very large market. And we're extremely happy to have gotten there. We have over 150,000 paying customers. We have a scalable cloud communication platform for messaging, email, voice, and video. We do more than 600 billion engagements per year. And we serve successfully eight out of 10 of the largest US tech companies. Fascinating thing with this market, 100% consumer penetration. There is no person on the planet that you can meet of the adult population that I know of that is not in any way, shape, or form a user of these services. Of course there are, but it's a very, very small percentage point. And this is a growing multi-billion dollar US market. It's probably a 40 to $60 billion market today, and we're a true leader. And we are the most profitable company in our space, important to remember, being profitable since our foundation and truly lead by the profitability in this market. Operator slide three, please. starting with financial targets, so the adjusted EBITDA per share rolling 12 months. And so the financial target to grow about 20% per year, measured on a rolling 12-month basis, and the strategy to combine organic and acquired growth. And obviously, this metric is affected by timing of share issues and consolidation of acquired adjusted EBITDAs. That's why we had a little bit of a lower growth in last quarter, but it also kicked it back up now. So a 36% growth in Q1 follows the closing of the major transaction in late 21. So this is what we were targeting, obviously, with a lot of these transactions. So very happy to report that as the financial target. Operator slide four, please. First quarter highlights. So the first one is the positioning. I mean, significantly increased scope in sales. So net sales growing 96%, gross profit 156, and adjusted EBITDA 183, including acquisitions. I've really diversified our earnings base with an adjusted EBITDA of 760 million in the quarter alone. This is by far the most profitable company in this space. Truly, truly best of the product for mobile messaging, voice calling and email. We're serving both enterprise customers, developers and SMBs in one company. And I think it's a very, very powerful offering. And the last 12 months performing at sales of 24.5 billion and then a gross profit of 8 billion. So that's a very strong position we've taken. We've got higher margins following acquisitions. So growth margin at 32% in Q1 versus 26 in Q4. Adjusted EBITDA margin at 12% versus 9% in Q4. And then coming to organic growth, revenue 22%, 17% organic, and then organic gross profit. This is primarily the Cinch Methoding business of 2% and 5% perform organic. And the organic gross profit is obviously not something we're happy with, not something we think, not how this market should, not how we should live in this market, but that's where it ended up in this quarter. Focus areas for 2022, obviously increased gross profit growth, really honing in on driving the organic gross profit growth, primarily in the messaging segment. ensuring costs, the growing line, the gross profit in the methoding and group functions over time. This is what we talked about before. We're in a situation where we're growing extremely fast and have been taking OPEX to grow at that level. And then it tailed off in two quarters here. And obviously then OPEX are set a little bit earlier. So therefore the OPEX growth takes a little bit of time before you tail it off. We now put programs in place for that. So beginning of Q1 we did. in order to take off OPEX growth to match the cross-profit growth over time here. Got a new operating model with full P&L responsibility for the business unit's president, so we're happy about that. And then really interesting opportunities for cross-sales of messaging, voice, and email products. All right, operator slide five, please. uh so gross profit evolution as you see here organic gross profit being two percent um uh we talked about that last quarter the minimum commit to this mobile the global mobile operator and causing a two percent negative impact of gp and q1 so it would have been four percent without that and the rest of this is is Still an ability to fully pass on carrier pricing traces in Brazil and India and price adjustments to large customers, causing lower margins or lower organic growth in this quarter. This is something we will work really, really hard on going forward. If you ask us, we would say that the trading environment, we think it's similar to Q4 2021. We see no major difference in the trading environment. a little bit, when you look at the actual numbers, a little bit lower on this quarter, but we think the trading environment is relatively similar. We also believe this is a strong market. We have seen these things before, a couple of quarters of slower growth, and after a while, we work through these things and we get back to the growth levels, and that's our strong focus to try to do going forward, of course, as well. including acquisitions, obviously very strong growth, both IntelliQuant, MessageMedia, and Pathwire, and driving a lot of growth in this quarter. All right, slide six, please, operator. So adjusted OPEX, so we had slower OPEX growth in 2020 due to the COVID-19 outbreak, so we held OPEX there. And we increased the OPEX base during 2021 to do sales and product initiatives and the large portion to prepare for upcoming large acquisitions, which happened then closed in Q4, to set up the company, all the processes in order to make sure we can handle that. And then, of course, businesses acquired during 2022 adding further OPEX. So in Q1, we had a 7% OPEX increase in Cinch and Wavy from Q4 to Q1. Michael Boucher- Mostly of this is currency movements, a lot of these costs are our US and US and Brazil, so therefore compared to that, compared to the sa K. Michael Boucher- It obviously with it with the current exchange rate climate it rise up explore outside and. We are also, like we said, we were in Q3, we were hiring, and those people coming in in Q1, and that's now tailing off since we put in OPEX control programs and slowed off hiring in the messaging segment and in the group functions significantly in Q1. In other areas, we are then growing as per OPEX growth, as per gross profit growth. Good. Operator, slide seven, please. This is the net sales and profit development in our messaging segments. So as you see, we have 25% transaction growth, 23% organic net sales growth, and then we have a negative 1% organic gross profit growth in this area. We can really see a strong underlying demand from the customers, but cogs and price at the same time, making the gross profit tail off in this quarter and then last quarter. And like I said, we've seen this before. We're going to work through it. It's not a demand problem, but obviously that is something we need to solve going forward. Message media contributes, offsets the organic gross margin decline. I'm happy to say that we had 8,600 new message media customers in Q1. and 29% revenue growth and 24% GDP growth in message media compared to Q1-21. Operator, slide eight, please. Voice and video. IntelliQuint contributes most of the voice and video business, obviously. IntelliQuint, as you know, including the 8YY reform, they had a 1% revenue growth in local currencies and also a negative 1% gross profit growth compared to Q1-21. The 8YY reform alone is a 9% impact on the gross profit growth from the price regulations on the US toll-free calling. Like we said before, we knew this when we acquired the company. We knew it would be slower reported growth in the first quarter due to this tail-off of 8YY. And as that tails off, obviously that will tail off in the coming quarters. Very solid, strong business with high profitability and high cash flow, as you can see. So we're very happy with this business and our position we take in the market and the stability and diversification it gives to our toll group. We have an IntelliQuent deployed sites in Europe, in France, Germany, and the UK, and starting to... you know, acquire customers there. We're happy to report that we had three new customers in Q1 on these new sites. So really seeing IntelliQuint going outside the US market where they are a leader. And this is in the long run, one of the growth initiatives we have put in place in IntelliQuint. If you remember from the acquisition, we saw this company extremely strong leader in the US market. We knew growth were lower, but we also know if we combine it with a set of growth initiatives going international, And increasing the sales sales force and if they only had 8% of their of their sales marketing optics and sales. And previously, and then also focusing more on the enterprise segments with programmable voice. Then we will be our plan is to drive up growth in this business. So the first one here going international is one of the growth drivers and we're happy to report the first customers. High profitability, adjusted EBITDA of 24% of revenue, and organic GP growth of Thomas, organic GP growth of 84%. That must be a typo, right? Yeah, sorry, right. So now I understand. This is the Finch messaging business. If we don't talk about the IntelliQuint side, Finch voice business. So Cinch organic voice business had an organic GP growth of 84% and returned to positive EBDA in this quarter. So super happy to see the strong development in that business, which is now folded into the total voice and video numbers. You don't see it separately. Okay, operator, go to slide nine, please. Email segment created upon closing on the Pathwire acquisition. Had a 27% revenue growth in local currencies and 18% gross profit growth in Pathwire compared to Q1 2021. The gross profit is affected by investment in scalability. So two things, hiring of support personnel, which is counted, or hiring of operations personnel, which is counted in COGS in this business. We were low on that in the tail end of last year and have hired there in order to better support our customers. And that is a step up in cost over time that will keep a lower growth in personnel on the operations side. So that will come back over the coming quarters. And then we have a cloud hosting vendor migration where we right now have double costs because we're moving from one cloud hosting vendor to the other. Eventually that will result in a cost reduction, but right now, obviously we have double costs since we're running two cloud hosting vendors. High profitability with an adjusted EBITDA of 37%, so very, very solid business as well. We see great cross-sale opportunity with the Pathfire business with all our other businesses and lots of engagement by the sales teams on both sides. We signed two cross-sell contracts in Q1 where enterprise customers in messaging now use Syngina and we continued cross-sales in Q2 including one of the top 10 global technology companies and now the contract as such with this global vendor or global tech company is is A good-sized contract, but not very large. But I think the interesting point is we really see, even when we go to the largest customers, there is a lot of interest in the Pathwire product, and it's being very well received from the mid-sized customers and the small customers all the way up to the largest customers. So we shouldn't go overboard with the size of this contract, but I think the power of actually being able to bring Pathwire into large customer bases, I think it's a very, very powerful and positive signal. All right, operator, go to slide 10, please. In the Cinch classic operator segments, we had a 17% organic revenue growth in local currencies and 12 compared to Q1 2021. Strong performance in the messaging interconnect services to mobile operators. Adjusted EBITDA margins stable at 9% compared to 8% previous quarter, despite a 7 million impact from the volume commitments from this carrier. And operator business will be included in messaging segments after the upcoming CINCH reorganization to the business unit structure. To remind you, look at slide 11, the business unit structure. So enterprise and messaging, driving a 70% GDP growth last year, being a large part of our business. Voice, 32% of the performer gross profit, 7% gross profit growth in 2021. Right now, we have the API a little bit bigger in Q1, so a little bit lower there. Developer Nebel, 11% of gross profit, but rapid growth. Applications is currently included in the messaging. And then we have the SMB segments, around about 11, and growing at, like I say, 20% gross profit growth last year. That said, I will leave to Roshan to go through the financials.

Thank you, Oskar, and good afternoon, good morning to everybody. Roshan Saldana here, CFO for Cinch. Yeah, so, I mean, if you turn to the income statement, which is on page 13, then you essentially see the significantly increased scope and scale of Cinch with a total net sales of 6.5 billion Swedish kronor growing 96%. gross profit growing 156%, and adjusted EBDA growing 183%. It also shows the changed margin profile with a gross margin at 32% in Q1 versus 26% in Q4, and adjusted EBDA margin at 12% in Q1 versus 9% in Q4. Adjusted EBDA is different from EBDA primarily due to acquisition costs, integration costs, cost for share-based incentive programs and foreign exchange-related movements. The total extraordinary items or adjustments for the quarter amounted to $112 million versus $141 million in the previous quarter, Q4 2021. Of this, integration costs were at $59 million versus 66 million in the previous quarter, more or less being stable through Q3, Q4, and now Q1. Further down in the P&L, you see the depreciation and amortization of 554 million, which is significantly increased. due to the non-cash planned amortization of intangible assets created through the acquisitions of IntelliQuent, Pathwire, and MessageMedia. $440 million of this $554 million is in total related to these non-cash amortizations. Excluding these non-cash amortizations, adjusted EBITs was at 647 million versus 243 million in the same quarter the previous year. We have net finance income and expenses coming in at 16 million. This includes an interest cost of 53 million, which shows the low interest costs that we have on the borrowings of the company. and income tax at an effective tax rate of 20% compared to the profit before tax. Turning to the next page, please, operator, here you see the reconciliation of cash flow to adjusted EBITDA. Adjusted EBITDA is then affected by paid interest, paid taxes, and other items primarily related to foreign currency flows before it ends up in cash flow before changes in working capital. This is the first quarter where we have the full consolidated adjusted EBITDA and cash flow before transition working capital from the large acquisitions completed in Q4. And here you see again the increased cash flow before transition working capital to $566 million compared to $226 million in the same quarter the previous year, giving a conversion of 74%, which is well in line with our expectations. Moving on to the next page, where you see the cash flow statement, we further take the cash flow before changes in working capital, and then we have the changes in working capital, which this quarter came in at a negative $426 million. This is to be equated to a reported minus $24 million in the Q4 of 2020. However, the minus 24 million also included acquisition balances that came in through the closed acquisitions in Q4, excluding that there was a positive effect of about 500 million in Q4 2021 for the organic business. The negative change in working capital during this quarter is affected by late payments from a few major customers and also return to normal accounts payable levels, which we will come to on the next page. Further investments remain at 129 million SEK, which is in line with previous trends of between 2% to 3% of revenues. However, slightly increased by the acquisition of IntelliQuint, which is higher investments compared to the rest of the group. And also this cash flow statement shows the strong financial profile with diversified earnings pools giving further stability to the cash flow generation capability of Cinch. Moving on to the next page, operator, which is the shows a development of day sales outstanding and days payable outstanding. This calculation is performed on a performer basis, both when it comes to the balance sheet and including the acquisitions that we have performed previously. Here you will see that, in general, the DSO has over this 15-month period trended slightly downwards. However, when specifically compared to Q1 of 2021, it is increased. As I said before, it's related to a few late payments from specified customers, which in the number of days is quite small, but gives a large impact in value terms. On the DPO side, you also see a very limited change compared to a longer trend. However, DPO can be affected by specific payments as well from CINCH, and you see essentially in December 2021 that AP levels were slightly higher, whereas now in March 2022, we're back to more normal accounts payable levels. So this shows that the underlying terms and conditions with our customers and suppliers remain relatively stable over a longer period of time. Moving on to the next page, where we summarize our financial targets. As we have said before, we have two financial targets. Number one, adjusted EBITDA per share to grow 20% year over year. And the second one being to keep net debt over adjusted EBITDA below 3.5 times, again, over time. And fueled by the acquisitions closed during Q4 of 2021, adjusted EBITDA per share grew 36% in Q1 2022, measured on a rolling 12-month basis. This includes the effect of share issues and emissions performed, and also perform a net debt over EBITDA excluding the effect of IFRS 16 related leases on both net debt and adjusted EBITDA came in at 3.1x versus our target of 3.5x. With that being said, I would like to hand over back to Oscar for concluding remarks.

Thank you. Thank you, Roshan. Yeah, so this quarter, Obviously, organic growth is not where we want it to be. We will work very diligently on that. This quarter, we also positioned the company in an absolutely stellar way in a very attractive market. Very happy to be when you're now at a trade show, now speaking to big customers, and they really see, you know, see us as one of the absolute top providers. It is almost like, why would we not do business with you? I think that's a very, very powerful position to be in. And really being singled out as one of the top leaders in this market is a very powerful position. So that's truly the positive news. And now we need to work very hard to get all the financial numbers at the right place. Thank you for listening. Let's open up for questions. Thank you. Operator, can we have the first question from the conference line, please?

Thank you. And just as a reminder, if you do wish to ask a question, you will need to press star one on your telephone. To withdraw your question, just press the pound or hash key. And may I ask that you also limit your question to two per person. Okay, so our first question is from Pridrag Savinovich. Sorry if I've said that wrong, from Carnegie.

Thank you very much, Operator. No, that sounds about right. And thank you for taking my questions. So my first one is really a bit on guidance. I know you don't guide, but your share price has been quite volatile. You'll probably notice there's some uncertainty also with investors generally. So I'm wondering at what point would you consider issuing guidance of some sort? And if not, why wouldn't that be the case or any kind of indications on the the cash flow over the growth is trending into Q2 would be very helpful. I'll start there. Thank you.

Rolf, do you want to take this one?

Yeah, I can try to start off. I think just briefly, on the guidance piece, of course, I mean, you know, we have not historically provided guidance. I think, you know, analysts like yourself do a fantastic job actually of forecasting change. And I think, you know, I think we're delivering quite much in line with consensus slightly above this time, but broadly over time, very much in line. I think the challenge, I think, from our perspective is, of course, that when we look into the business, I mean, there are a few factors that we see that are predictable. And as we said before, I mean, we think that the cost increases that we've seen and the price changes that we've seen towards customers are things that will play out over time. And I think we have fairly reasonable visibility into those. But there's always a risk of unknown factors kind of affecting business development. And I think what we've done over the last 12 months essentially through increasing or through diversifying our product pool is increased stability and increased stability in our earnings pool and in our revenue pool. That continues to be the effort going forward to work on that front. On the second conclusion, when do we see things turning around? I will let Oscar comment on that as well. I think the first thing, as I said, is we do see that there are things that are negative now that have a limited shelf period and will play out during the course of this year. But that doesn't, you know, I would not go as far as to say that, you know, to make that into a guidance or a prediction because I think, you know, again, as we say, there could be other unknown effects that might show up later in the year. From a cash flow perspective, I think, as we said, working capital, you see that the underlying DSO, DPO trends are fairly stable. We have short-term effects of some customers not paying us in time during Q1. That's something that we continue to work with, but we see no credit risk, and there's no reason to believe that that shouldn't come back at a later point in time. Oscar?

Yeah, no. So on on the ground, that's hard to know. And as you know, we don't get guidance for the for the above reasons. And the and we have seen this a couple of times before in this market. And we're talking we're talking about the messaging segment, right? That's when you talk organic that we're talking about the messaging segment. The we've seen this a couple of times before. And it is not a demand problem. It is not a volume. It's not a revenue problem. Customers are still buying. But then a couple of quarters, you get tougher comparisons, you get tougher price negotiations with big customers and big operators, and then organic growth tail off. But every time we've seen before, it takes a couple of quarters, and then we get back when these changes have winded out. I can't say today when and therefore we won't give a projection, but we have good confidence in this market and good confidence in our ability to play in the market and therefore we have good confidence that we will get back to better organic growth. On the IntelliQuint side, you have the eight by wire form, of course. So it depends on if you look at the reporting numbers or the normalized numbers without it. But that is something that will take off during the coming quarters. So that's an outside, more concrete effect that we know of and that we knew when we made the acquisition on IntelliQuint. Thank you. Next question, please.

Am I still on the line? Can I ask another one?

I think, well, let's count that as one, and you'll get one more.

All right, fantastic. I wanted to ask a question on product and security generally, and I think it's quite safe to say that you have a true super network compared to your competitors, and to end, make it by definition a safer, more reliable service than some of your competitors, or most of them. And I know you're already embedded in some security applications as well. Trying to see if this is something you can give you an edge in the market and win more business on as well, because that's also quite an important theme, generally speaking, right?

Yes, it's a very important theme. Definitely in some areas you can, especially towards smaller players, you can. And then in some regions you can. So that's something we work hard on, and we think it's a very important feature of this type of product in the markets. And definitely that is in many RFPs. We get asked about security and security reviews and have audits, et cetera. And in many cases, that's something we can win business off. Thank you. Operator, next question, please.

Thank you. Your next question comes from Stefan Goffin from DMV.

Yes, so I will try to ask Fredrik's question in a different way. So on the drag on the gross margin, you have mentioned volume discounts to large customers, and that was introduced in Q1 last year, so likely fully impacting Q2. Price increases from operators was first mentioned in Q2 and likely then full impact in Q3 or at least in Q4. And then it was the fixed volume contract that was introduced mid-2021, and there we know that that should end in June. So, I mean, when these things play out, you should start to see easier comps. Did the timing that I said, was that correct? And hence, should we start to see at least easier comps from Q3 and onwards?

Thank you, Stefan. I'll try to reply to that one. I think you're right in highlighting some of the things that we've talked about over the past years that affect our business. you know, at any given point in time, we try to bring up, of course, the most material aspects that affect performance. You're also right that, you know, sort of how the maths work out is that typically in 12 months after a deterioration, you know, you are facing easier comps, right? And that sort of creates relief, unless you see, you know, continued underlying pressure or something new arising. I think what we're careful to avoid is to say, you know, on a total level, you know, things will improve by this and this time. We can confirm that there are numerous factors that, you know, will ease, you know, gradually during 2021. And, of course, if nothing else happens, then that should, you know, reflect an improvement in our numbers. With that in mind, we're very careful to avoid any hard statements. as some parts are quite hard to predict. I mentioned one concrete such area is you take some of the carrier price increases that we talked about, do not make a lot of sense from our point of view, and of course that makes forecasting carrier behavior in that sort of situation a little tricky. That's not necessarily representative for all carriers in all parts of the world, but in this particular case, and if we talk about Latin America, that's the case, right? It makes it harder. Roshan, anything you want to add to that?

No, I think that's good.

And then regarding OPEX, you mentioned that you have sort of put a break on that during Q1. So should we expect... that it can be much more stable going into Q2, Q3, et cetera.

Yes, we put a break on the messaging and core functions. I mean, running it in business units means that you've got to own the business units that grow. You've got to continue to grow, right? And the business units that don't grow, you've got to take it off. That's how you have to run it, right? So, yes, we've done it in messaging core functions. And we very much see which is the largest part of our cost base, tailing off. We see that right now. But in Q1, we still have the backlog effect from hires done during late and mid 2021, right? So that's what we expect because we will follow our commitment to run the GP and OPEX growth over time in line. This is what we have talked about a couple of quarters. It's hard to time exactly, especially when you do like what we did here. If you consider we were growing very, very rapidly organically, and we did emanating growth, and we're setting up the company. We needed to take investment to support that, and then the organic growth paid off. It's hard to do that quick enough, right? You always wish you did it quicker. But that's what's happening right now, and then we have to do it a little bit, make sure we match it over time. Okay, thank you.

Thank you. Operator, next question, please.

Thank you. Your next question comes from Daniel Djerberg from Handelsbanken.

Operator, thank you for the question. First question would be a little bit difficult comment. Do you have one of the market's most comprehensive CPaaS portfolios now? obviously early days, but can you give us any proof point that your best of breed strategy really worked with regards to cross-selling that could create better customer stickiness as well? That's the first question. Thank you.

No, definitely. I mean, one of the most concrete examples of that is cross-selling of emails. We sold two customers in Q1 and then continued in Q2. We stated one of those customers was one of the top 10 global tech companies. I think I'd say the contract is a good, solid contract, but it's not massive and huge. So let's not read too much into that individual contract. But I do think we see the trend of walking in with our total portfolio into these very large customers as a very positive reception. That we know now. And that is exactly what I think we were after with combining this group. And I think we see strong signals there on everything from small to very large customers.

Perfect. And my second question, if I may, would be on the... You mentioned the pricing in Brazil and in India and... Also, you didn't see it. It made sense for operators raising prices to this level. But still, since volumes are still kept quite high and growth, i.e. when the CPAS players take the hit, so to say, in margin, why doesn't it make sense for them? And why shouldn't the price increases continue, given that the buffer is... so to say, the C++ right now. What do I miss?

Yeah, I don't think the buffer, I mean, C++ is only a small portion of the buffer, right? If you increase the price with 30%, like they did in Indian Brazil, a small percent of that is obviously buffered by us in this case, but the majority is taken by the customer. And what's happening then is the customer's, eventually starts to find other channels, which may be, you know, WhatsApp or so, which comes back to us in revenue in another channel. But that's when the operator takes the price, takes the hit, right? So it's not the full monopoly because there are other channels to customers, and therefore, you know, they will eventually see that, all right, that strategy doesn't work.

Okay, thank you, and good luck in Q2.

And again, I mean, the price increase is nothing new. It has happened many times before. It is unfortunate when it happens, but we've seen it many, many times before, and we have this pattern. And then after a while, you get back to solid margin and growth, right? So that's nothing new in this market. Thank you. Operator, next question, please.

Thank you. Your next question comes from Andreas Marku from Berenberg.

Yes, hi, everyone. Thanks very much for taking my question. So the first one is kind of a follow-up on Brazil and India. I guess what is your conviction that you can actually pass on these price increases in the next couple of quarters, given that I think the general economic expectation is that the macro situation will remain quite difficult in those countries? So that's the first one. Thank you.

Thank you. Thank you. I'll start off with an answer to that one. I think you need to differentiate two factors here, right? It's what you're essentially seeing is a margin compression due to these changes, right? And just the way the maths work out is 12 months later, you will have annualized that deterioration and your comparables improve, right? That we can say with some confidence, of course, that 12 months after a deterioration, things get a little better unless something new happens, right? So that's relatively mechanical. Then, of course, whether you can actually recoup or, you know, pass on the actual rice to end customers is a little bit of a different question. What we said in Q4, and I still think remains true, is, you know, for India, it's more clear. The cost increases has a very specific nature, and it's related to a technological improvement due to digital ledger technology to combat spam, which is genuinely a good thing for the market, right? It just takes time to pass it through. In Brazil, it's more a question of tough competition and sometimes irrational competition, where it's harder to call how that will develop. But to round things up, the annualization, of course, takes 12 months.

Okay, so I guess you are confident of being able to pass this on in the next couple of months.

That's not what we said. I think what we said is that months, you know, 12 months without cost. Yeah. Okay.

Okay. And maybe on the second one, just on intelligent, can you give us a bit more detail on the steps you're taking, um, to improve the growth in the coming quarters? Obviously you mentioned again, the mechanical factors, um, the impact of 8YY tailing off. But what are the actual steps you're taking to materially improve growth here?

So, yeah, you're correct. There are two mechanical factors. 8YY tailing off and you've got the COVID effect. They had a 30% sudden increase when COVID came. So that's the two things that are mechanical, if you will. The other area, it's three areas. It is internationalization of their offerings. So we're now done Germany, france and and the uk and and in there they have they have launched services or deep services and they were now starting to win customers so that's one and number two is we're increasing their sales and marketing efforts and if i remember correctly now from the acquisition i think that at acquisition eight percent of their opex was in sales marketing i may be wrong on that on that number with a percent or two but a very low percentage. So we're increasing the sales and marketing effort, and it's very logical. They have a very large network, very strong network, but not enough resources in the sales and marketing, and therefore they're not really capitalizing enough on the network. So that's number two. And number three is an increased focus on programmable voice and selling into enterprises. So IntelliQuint has traditionally not had a solid software offering on top of their network, and they have not tried hard enough to sell to enterprises. They mostly sell to what they call carrier service providers or maybe CPaaS providers or the UCaaS and the CCaaS providers. So the very large providers is what they've sold to, but they've not sold to enterprises. That's basically an untapped market for them. And we're addressing that market as well. So that's the three main growth bets for IntelliQuint.

Okay, thank you very much. And best of luck with everything.

Thank you.

Thank you. Your next question comes from Mohamed Marwala from Goldman Sachs.

Great. Thank you. I had two questions. Firstly, obviously you're managing a series of headwinds, some related to obviously the pricing of the telcos. You're also kind of busy integrating acquisitions. You know, as we start to look at these headwinds and how they start to shift, I know with the telco pricing, you're saying this may take several quarters, but in terms of kind of your own kind of integration of the acquisitions, how should we think of this in terms of impacting that sort of gross profit evolution? You know, should we see that we're kind of at a troughing point in kind of Q4, Q1, or is that trough going to be perhaps a bit longer? And then 2023 is really more the year of a step up in kind of gross profit acceleration. And then the second question I had was, if you see volumes move from SMS to sort of WhatsApp, will this be kind of gross margin accretive? And so when the telcos kind of hike up prices a lot, how much of this could drive channel shift as well?

Thank you. You want us to... Sorry, go ahead, Oscar. Yeah, and maybe stop with the first question. I'll take the second.

Yeah, so, I mean, on the pricing side, Mohamed, I mean, you know, the pricing, telco pricing side and the integration, I mean, of course... you know, what we see essentially, as Thomas mentioned earlier, is you have this analyzation effect, right, and in the markets that we've already talked about in the previous quarters, I mean, you have this analyzation effect, which will drive out, which will run out, you know, during later quarters this year. I think what we're seeing is, you know, we've seen positive signs from the integration of STI. I think that's something that we talked about during 2021 as a drag on growth, and I think, you know, Right now, it's not as much of a worry, and I think it's being integrated very well. One of the things that you might like to remember is also the fact that the acquisition of Wavy in LATAM became a part of the organic growth from February of 2022 because that acquisition was closed in the beginning of February 2021. So sequentially, the weightage of LATAM in the organic base has grown in Q1 compared to Q4 last year. Now, from a tailwind perspective, I think, you know, what you're seeing essentially is the margin profile changing, you know, due to the acquisitions that we've done in late 2021 and, you know, the gross margin kind of going up to 36%. And I think that is something as we see more cross-sale of email and voice that as well as SMS and WhatsApp to our customer base, you know, we should see a positive development in, you know, all else alike positive development in the gross margin development over time. So hopefully that was the answer to your first question. And then, Oscar, I don't know if you want to comment specifically, add to that or comment specifically on the SMS to WhatsApp question.

Yeah, the SMS to WhatsApp, it's two things, right? One thing that happens is just the transaction volume moving from text to WhatsApp. I think that's equal or hard to tell what the margin is on the pure sending transaction. But what does happen is with WhatsApp, you get the more interactive transaction. You get the more interactive solution. So people start to respond a lot more. And when people start to respond, you also need to maybe sell a bot to it. So you get into selling also more of a proper SaaS service on top of the channel. And that is typically driving up gross margins. So transaction level may be higher. maybe similar, but in some cases lower, in some cases higher, a little bit depending on. And then you have the kind of the SaaS service on top, which is typically higher. That's typically what happens, right?

I could come back to my first question. So I guess what I was trying to kind of better understand is, as we think of the growth trajectory, what I was trying to say is, is the year this year going to look very similar to what

last few quarters has been or is there kind of chances of a kind of re-acceleration spike um you know at the back end of the year or should we wait till 23 before we see kind of the full effects of kind of growth acceleration yeah i mean i mean we don't give forward-looking projections but from our perspective we obviously work really hard to to get to the increased gross profit growth and get our again it's like get our revenue and volume growth down to the gross profit level I mean, that's what we're talking about here, right? It's not like customers not paying. It's not like we're not growing on the top line side, but it's getting that down to the lost profit level. We're working really hard to do that as soon as possible. Exactly when it happens, it is a little bit hard to tell, but previously when we see this, it's a couple of quarters, and then we have previously gotten back. So that's what we're working on. Thomas, I don't know if you want to add anything.

No, that's clear. Thanks. Thank you.

Thank you. Your next question comes from Frederick Liddell from Handelsbanken.

Thank you very much for taking my question. I was thinking about messaging with the minus 1% organic cost profit growth. You alluded to many factors behind that. Have you done your own calculations and taken out one or two or three or four of the volume commitments situations, or have you taken out the Brazil and India effects and see what sort of the remaining underlying entities are doing in terms of organic cross-profit growth? Is that sort of an elaboration you do and that you could share with us would be the first question then. The second one is on intelligence. Again, if you could sort of elaborate a little bit on the split between the CPOS unit and the interconnect unit and how they are progressing and how they sort of combine into the trend you have right now. Thank you.

Thank you, Fredrik. I'll start with the first one. What we have disclosed in terms of the different components of messaging is We've quantified the effect of this fixed price agreement that we first talked about in Q4, which had a minus 37 million effect, 5% on gross profit growth in Q4, minus 15 million for the total group, and minus 2% effect on gross profit in Q1. So that's been quantified. In terms of separating out the effect of individual carriers, price changes, and on the other hand, talking about price changes towards customers, of course, we do a lot of math. It's not a perfectly clear cut in the sense that there's an interdependency, right? You know, the one thing actually affects the other. And what we've said is, These are the two main things we want to call out in why the healthy revenue growth that we see is not translating currently into gross profit growth. Okay, thank you. On the Intellicom question, the CPAS versus Intercone, I didn't really understand that question. So I think to give some background, and Oscar, I'll hand back to you, I mean... When we acquired IntelliQuent, we said about half of the business is carrier-related and half of the business is enterprise-related or more CPaaS-oriented, right? Yeah, exactly. So that's the split, and we've said that long. We will invest to grow on the enterprise side. This is one of the aspects Oscar alluded to earlier. This has been in the books for a few months. There haven't been any material changes yet. since last. But we could come back perhaps with more details. It's an interesting topic and, of course, a source of long-term growth acceleration in IntelliQuint. All right. Thank you. So, yeah, no material changes from previously. I mean, we only closed that acquisition a couple of months ago. We see low traction on the internationalization. Happy about that. We start to see traction on the enterprise side. Happy about that. but it's a big base, so in total numbers, it's going to impact right now. There's no material impact on the numbers yet, even though the CDR designs, right? Okay. Operator, next question, please.

Thank you. Your next question comes from Pontus Wachtmeister from SEB.

Hi, guys. Thanks for taking my question. When we spoke a while back, you mentioned that these amortizations, the PPAs, they were not fully tax-deductible. Looking at the first quarter, it doesn't seem like they seem to have been tax-deductible. Is there anything you have changed in how you look at those, or did I misunderstand the first time?

So, Gautam, thanks for the question. I think the tax deductibility of acquisition-related assets and depreciation for acquisition-related assets varies a lot from country to country, from jurisdiction to jurisdiction. In some countries, we can even amortize goodwill and obtain tax deductions for that. There's also sometimes we need to perform push-down accounting or merge entities to be able to get that tax deductibility. This is something that we are working with in these jurisdictions, both working internally and with external advisors to find optimal structures so that we responsibly pay tax, both for our shareholders and for those countries we operate in. So, you know, I don't think there's a straightforward answer that, you know, says that all of that is tax-deductible or all of it is not tax-deductible, but rather it's kind of a mixed answer per jurisdiction. I think in general, an effective tax rate, you know, that we've reported as we've reported this quarter, you know, and maybe a little bit north of that is a fair assumption to have in the medium-term percentage.

Exactly. Okay. So some of it won't be deductible. I can try and use as a proxy, but not all of it. Okay. Thank you very much.

And the next question comes from Daniel Thornton from ABG.

Yes, thank you very much. I have a question on the demand side. We basically see all of you CPAS players growing healthy on top line. You had a 22% organic sales growth this quarter, even though it has been coming down a bit lately. So if we leave the COG challenges out for now, where do you see growth coming from? And is there a risk of deceleration further during 2022 as we leave the pandemic behind us to a larger extent? I mean, if we see a slow organic sales growth, even a stabilization of the gross margin would result in pretty modest GP growth. So just to try to understand the demand situation, how do you see 2022 developing?

No, we see in general a solid demand for CPAS services. And I think all the trends and projections that people have done, like Gartner from, what is it, 15 to 80% of all major enterprise customers will buy CPAS services up until 2025. We see those trends happening. So I think demand side is good in general and we see a lot of demand for the services in across across all the different product lines and so so no reason to assume a slower growth on sales organically during 22. no i don't think so i think it's more more than down to the sheer size of i mean as you get larger and larger and larger right so but But we don't see any slowdown in the market or slowdown in interest from the customers or slowdown in their willingness to pay for this type of services, no. You may, of course, have in the pocket here or something happened there, but not in general. So in general, we believe we're going to have a very strong market and very well positioned. Then I 100% agree. the organic growth side needs to be higher. But in general, strong markets, strong positions.

Excellent. And then a question for Roshan, the technical one. The 440 million amortization of acquired assets in Q1, is that a fair level to expect going forward as well or anything moving in Q2 here?

No, I mean, you know, that might change marginally during the course of the year because, you know, purchase price allocation is only preliminary when we first record it, and we have a 12-month window post completion of the acquisition where we review the purchase price allocation and make adjustments. We can come back to that.

Okay. But so far, we can assume that level going forward, I guess. No direction here that you can guide on. Yes.

That's fair.

Thank you very much.

Thank you for that, and thank you, Operator, for all the questions. I'll hand the word back to Oskar for concluding remarks. All right. Thank you for your interest. Obviously, CINCH has historically been providing very solid growth numbers organically and solid M&A growth numbers. these two quarters we did hit the m a driven the non-organic growth numbers we did not hit the organic growth numbers and that is our number one focus going forward um and we are very happy with the position we've taken and we see we have a very very strong position in this market um and we do believe this is a very strong market going forward and a very large market and we are excited to continue to work in it um And I think that will conclude the remarks for this presentation. And thank you a lot for listening. And thanks for asking all the questions.

Thank you very much. Thank you.