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?