Sinch AB (publ)

Welcome to the Cinch Q2 2022 results. Throughout the call, all participants will be in listen-only mode, so there's no need to mute your own individual lines. And afterwards, there'll be a question and answer session. Just to remind you, this conference call is being recorded. I'll now hand the floor to Thomas Heath, Chief Strategy Officer and Head of Investor Relations. Please begin your meeting.

Thank you very much, Operator, and good day, everyone. Welcome to the Q2 2022 conference call with Cinch AB. My name is Thomas Heath. I'm chief strategy officer and head of investor relations. And with me today to present recent developments are Erik Flöerberg, our chairman, Johan Hedberg, our interim CEO, and Roshan Saldana, our CFO. With those opening remarks, may I ask the operator to switch to slide two and hand the word over to our chairman, Erik.

Thank you, Thomas, and good morning, good afternoon, everyone. I'm Erik Proberg, board member in Cinch since 2011 and chairman of the board since 2015. I also represent Next, the largest shareholder in Cinch. The reason that I'm here is that the board yesterday announced that we will initiate a search for a new CEO. In the past few years, Cinch has grown rapidly, both organically and through acquisitions, and Cinch has established itself as a global leader in cloud communication and customer engagement. We've followed a well-defined strategy. We've acquired eight companies in the last two years, in 2020 and 2021. Through these acquisitions, we've strategically repositioned the company, and we're very confident with the strategic and market position the company has today. Despite our strong strategic and market position, Synch is today facing some challenges, both external and internal. External challenges are related to changes in the macroeconomic environment, high inflation, increased interest rates, higher cost of capital, the current geopolitical situation. This all leads to changes in investor behavior where investors focus more on profitability, cash flow, and to avoid risk. This is something we believe we can cope well with since we've been profitable since day one, since the establishment of Cinch. As regards to internal challenges, they're mainly related to slowdown in growth profit growth in the messaging segment in the last three quarters, combined with continued increase in operating costs. This has resulted in lower profitability. The Board of Directors' assessment is that after a period of large acquisitions, we are entering a new phase where we need an increased and stricter focus on profitability and cash flow. We will also focus on consolidating the acquisitions integrating platforms and extracting synergies. In discussions with Oscar Werner, we have come to a conclusion that we need a new CEO for this new phase and have therefore announced that we will immediately start the search of a new CEO. I would like to take this opportunity to thank Oscar Werner, who's led the company through four years characterized by strong growth and many acquisitions. Johan Hedberg will take over immediately as interim CEO. Johan is one of six founders of Cinch. Johan was also the CEO of the company between 2010 and 2018. Johan knows the company extremely well. Several board members knows him since his period as a CEO, and the board is confident that Johan will be able to take the right steps to improve financial performance, profitability, and cash flow. and also to implement the cost-cutting program that we've announced today. Johan will be interim CEO until we have found a new permanent CEO and a new permanent CEO is in place. With these initial words, I will turn over to Johan Hedberg, our new CEO.

Thank you, Erik. So my name is Johan Hedberg. I'm one of the co-founders of Holds Finch back in 2008. I was the CEO from 2010 to 2018. And since 2018, been working with our M&A strategy and execution of that strategy. So I spent a long time with the business and know the market well. The marketplace is there. We have 150,000 customers, including eight out of the 10 of the world's leading and demanding tech companies. This is resulting in 19,000 customer engagements every second year round. We have grown rapidly, and now is the time to extract revenue and cost synergies. Priorities are in the following order. One, cost control in messaging and central functions. Two, profitability and cash flow. Three, growth. We need to prove economies of scale, improve operational efficiency, and work to extract costs in years from acquisitions within the messaging segment and central functions. The marketplace is attractive and will also drive initiatives to enable growth. Send more services cross-sell into our combined installed base. Optimize the different go-to-market strategies to win customers at lower costs. focused product development close to the customer where we can get rapid return on investment. So I'm looking forward to dive in. I wish to thank Erik and the board for the trust. So with that, I'm handing over to Roshan to present the quarterly report.

Thank you, Johan, and thank you, Erik. Good day to everyone joining this call and webcast. This is Roshan Saldana, Group Chief Financial Officer for Synch. I'm going to walk through the results for the second quarter of 2022 on behalf of the Finch team. Operator, could you please turn to page four? Finch is a global leader in cloud communications and mobile customer engagement. We had 22.3 billion kroner of net sales during the last 12 months and over 2 billion in adjusted EBITDA in the same period. In addition, we generated nearly 518 million in free cash flow to equity during the first half of 2022. We are operating in a global multi-billion dollar market, have over 150,000 customers, and have been profitable since our foundation in 2008. Operator, could you please turn to page five? CINCH has two financial targets. One of them is to grow adjusted EBDA per share more than 20% per year, measured on a rolling 12-month basis. And the other one is to keep leverage as measured net debt over adjusted EBDA under 3.5% in multiple terms. Our strategy has been to combine organic and acquired growth. And as you see on this page, we now see 49% growth in the second quarter on a rolling 12 month basis following the closing of major transactions in late 2021. This metric is of course affected from the timing of share issues and consolidation of acquired companies. Let's turn to page six. Here we present some highlights from the second quarter. Number one, I think, is strong cash flow. We have net sales on a total basis growing 80%, gross profit 123%, and adjusted EBITDA at 77%. The quarter is affected by a reassessment of reserves or accrued traffic costs, which affect gross profit EBITDA and adjusted EBITDA in the messaging segment by 162 million Swedish kronor. We reported adjusted EBITDA of 503 million Swedish kronor and cash flow from operations at an improved level of 668 million. The last 12 months before my next sales were at SEC 25.6 billion with a gross profit at 8 billion kronor. We have a stable and growing business in the voice, email and SMB segments. The voice segment has a gross margin of 46% and an adjusted EBITDA margin of 21% for the quarter. The email business has a gross margin of 73% and an adjusted EBITDA margin of 37% for the quarter, which is affected by the migration of hosting providers in the email segment. And the SMB business then has a 61% gross margin and a 28% adjusted EBTA margin. We're operating the business as per the new operating model, which was released in February or announced in February of 2022, where each of the five business units have full P&L responsibility. I'll come back a little bit later to how this reflects in the various segments. And then thirdly, we are announcing today a cost reduction program in the quarterly report focused on the messaging segment and group functions. This cost reduction program is driven by the lower growth in gross profit that we have seen during the last nine months and margin pressure. In addition, we have a price adjustment to a large customer impacting the current quarter. And looking forward, we are seeing macroeconomic uncertainty in various markets that we operate in. We're targeting gross savings of 10% in the messaging segment and central functions through this program, which corresponds to about 300 million Swedish kronor on an annual basis. And we expect that the program will have full effect from Q3 2023. but that we will have incremental increased savings during the quarters until then as well. Operator, please turn to page, to the next page, page seven, which shows a bridge of gross profit from last quarter 2021, from the last year Q2 2021 at 869 million Swedish kroner to the reported gross profit this quarter of 1,937,000,000. As you can see, foreign currency movements affect this gross profit this quarter with 10% or 83 million Swedish kronor. In addition, we have a growth of 138% coming from acquisitions with IntelliQuent being the, or the business related to IntelliQuent being the largest contributor at 652 million. Message Media at $277 million and Pathwire at $260 million. And then finally, Messenger People, which is the other M&A, at $13 million. In the organic, including the changed reassessment of cost of goods sold, grew with minus or reduced by 25%. The largest part of this being, of course, the reassessment of $162 million, but in addition to that, we had an organic decline of 55%, which is approximately 4 percentage points. If we look at the Performa base as though the acquisitions would have been part of the business for the entire part of 2021, then the Performa organic gross profit growth was at 0% or flat. In addition, when we look into the messaging segment further in detail, we see that price negotiation with one of our largest customers in messaging hampers gross profit growth by 9% on an organic basis. We see, however, continued growth in emails and SMBs. And in addition now, due to the overall growth of the group, we see also that our customer concentration reduces where the largest customer now is 5% of group gross profit with the top 10 customers accounting for 20% of gross profit. Operator, please move to the next page on OPEX development. Here you see the adjusted OPEX, which is the OPEX between gross profit and adjusted EBITDA. and we reported and adjusted OPEX of 1,434,000,000 for the quarter, of which 791,000,000 came from the organic business and 643,000,000 from acquisitions that were done after Q2 2021. You see that there is a significant increase in year-on-year organic OPEX going from 586,000,000 to 791 million this year. The largest part of the OPEX that we have in this company relates to personnel, both employees as well as staff augmentation. The personnel related OPEX is stable in the second quarter versus Q1. The cost reduction program, of course, is targeting primarily the messaging and group functions, which is then the bar that is shown in green of $791 million for the quarter. Let's move on to the next page, which is then showing the new operating model. Here we have the five business units that the company is organized in, enterprise messaging, applications, voice, developer and email, and SMB. You also see the different gross profit profiles, gross margin profiles, and adjusted EBDA margins on this page. The focus in 2022 for enterprise and messaging is of course on the cost reduction program, achieving economies of scale and efficiency, as well as then recovering gross profit growth. and increasing cross sales of other products to large enterprise customer. In the application segment, also there is a focus on cost efficiency, but in addition to that, product unification and international expansion. In the voice business unit, which is equal to the voice segment, the focus is, of course, on cross sales of voice and messaging, as well as international voice expansion. The business is hampered currently by the 8YY reform that reduces revenues and gross profit. On email, we have a continued focus on profitable growth as well as on cross sales of email to Cinch Enterprise customers and cross sales of SMS both to Pathwire Enterprise customers as well as to the developer community that Pathwire engages. And then finally coming to SMB, we can see continued growth in the United States through new customer acquisition, as well as we have in the quarter completed an integration of SMS backend to the Syng global platform and extended only channel capabilities leveraging Syng computational API. To give some other highlights from the business, from these various business units, I would like to maybe point to the fact that in the messaging segment, we have now launched the Messenger People product for chat-based customer service through next-generation messaging in Brazil. In the voice segment, we also announced on the 9th of June that the company had become a Microsoft Teams Operator Connect partner, which means that the company solutions can be used to connect outbound calls from Microsoft Teams. In the email segment, we were encouraged by the fact that we signed the largest contract to date in that business, which was closed during the quarter in the form of a multi-year agreement with a new customer in the public sector. And then in the SMB business unit and segment, we have one of the largest mobile operators in Australia now offering Synch's SMB platform under its own breadth. In addition to these five segments, to these five business units, we of course have the central functions, which is reported under the other segment. And the cost for the central functions during this quarter amounted to 103 million, consisting mainly of employee expenses in finance, HR, IT, and other staff functions, as well as office facility costs. Operator, could you please go to the page number 11, please, where I will start to walk through the financials. As you see on this page, we have reported gross profit of 1,937,000,000, which is affected by the reassessment of reserves or for accrued traffic costs that I mentioned earlier of 162,000,000. We had an EBITDA of 528,000,000 for the quarter versus 152,000,000 for the same quarter last year. The EBITDA is higher than adjusted EBITDA this quarter due to currency effects. Depreciation and amortization was 577 billion, which includes of course, non-cash amortization related to acquired entities. And we have reported an adjusted EBIT then which excludes the depreciation and amortization effects as well as the the one-off effects in EBITDA amounting to 390 million for the quarter. Moving to page 11, we bridge cash flow before changes in working capital to adjusted EBITDA. We would like to highlight in this quarter that the cash flow before changes in working capital is affected by realized currency effects on financial items, which then is reflected in the line other items. and impacts the second quarter by 248 million negatively. Operator, please move to page 13, where you see the full cash flow and then continuing on from the cash flow before changes in working capital. We had a recovery in working capital development in the second quarter compared to the negative development in the first quarter. and therefore see an improved change in working capital of $579 million. On a rolling 12-month basis, the change in working capital is affected by about $500 million addition of working capital within acquired businesses. This is a strong financial profile with a diversified earnings pool coming from many different customers and many different products and business segments. And the net debt decreased by 326 million during the quarter. We understand also that from the discussions that we've had and the reports that have been shared online, that there is some questions around receivables. And we would like to take this opportunity to clarify those questions. And therefore, we have added a few pages around receivables and revenue recognition. Firstly, I want to say that no revenue is recognized at sale. It is recognized when the performance obligations are completed. We are on page 14 now. When you look at the balance sheet, we have the item unbilled accounts receivables, billed accounts receivables, and accrued revenues. The unbilled accounts receivables are of course not yet been invoiced to the customer, but where we have an unconditional right to payment. These are recorded as revenues when the performance obligation is completed. And typically they are invoiced to customers within a few days after the period end. As at 30th of June, 2022, we had 1.8 billion Swedish kronor of unbilled accounts receivables. Billed accounts receivables are also then where we have an unconditional right to payment. Again, they are recorded as revenues when a performance obligation is completed, and they have been invoiced as per the same schedule that we have for unbilled, but they have been invoiced before the reporting period. We had, as of 30 June 2022, $2.8 billion in billed accounts receivables. And then finally, we have contract assets as accrued revenue or accrued income from customers. The difference then from accounts receivable is that there we don't have an unconditional right to payment. However, they are recorded as revenues as and when the performance obligation is completed. And again, the invoicing would follow a normal, typical schedule as well for these revenues, depending on the customer contract and the completion of the performance obligation. And we have 91 million at the 30th of June 2022 in accrued revenue or accrued income from customer contracts. In addition, of course, we have expected credit losses reserved as of 30th June 2022 of 169 million. and even the accrued revenue figure shown above is shown net of an impairment reserve. Operator, let's move to page 15, where we show the full breakdown of current assets from the quarterly report. As you can see, in this breakdown, our accounts receivable and accrued revenue when taken together has grown with 1% compared to to Q1 from 4,579,000,000 to 4,614,000,000. It's important to consider here that our business is mostly in the US and we have a large number of US dollar denominated customer receivables. The US dollar when comparing the closing exchange rates from Q1 to Q2 of this year moved with more than 10%. and therefore on a like-for-like basis, the US dollar denominated portion would have increased by 10%. The movements in other major currencies like Euro and Pound are not that significant. They are in the 2% or 3% range, but the US dollar movement was quite significant. So on a like-for-like basis, a 1% absolute growth actually means a decline, a slight decline on an underlying basis. And then Again, moving on to page 16, as we did in the first quarter, we would like to show you the development of Dale's sales outstanding and Dave's payables outstanding. And again, on Dave's sales outstanding, we have a more or less flat development versus Q1, despite the fact that revenues have increased by 1% compared to the first quarter. and more than 80% compared to last year on a like to like basis. And then on DPO, of course, we have to remember that there is a limited DPO change compared to Q4, but a larger change compared to Q1 here. Finally, a couple of closing slides. Moving on to slide 17, just reminding you about the rising gross profit for Cinch, where on a pro forma basis, we would have had 7.7 billion in gross profit in 2021. On a reported basis, most of that gross profit, of course, came from messaging and a smaller portion from voice. But on a performer basis, we had a much more diverse pool of earnings with 46% coming from messaging and 32% from voice, 11% from email, and 11% from SMB. Moving on to page 18, I would like to again reiterate our financial targets, which is adjusted EBITDA per share to grow more than 20% per year and net debt to remain under 3.5 times adjusted EBITDA over time. And adjusted EBITDA per share grew 49% in the second quarter, measured on a rolling 12-month basis, and performed a net debt over adjusted EBITDA. Our leverage measure was at 3.3x, excluding IFRS 16-related leases, which is still below our target. With that, I would like to hand over to Eric. if you have any closing remarks before we open up for Q&A.

Eric? Thank you, Roshan. Okay, just some final remarks here. The result in Q2 is similar to the result in Q1 with the exception of an increased reserves for COGS related to 2021. But we have significantly better operating cash flow in Q2 than in Q1. We will continue to execute along the strategy that we have established. However, we will move into a new phase in the history of the company. We have announced a cost reduction program. We've also appointed a new interim CEO, and we've initiated a search for a new permanent CEO. Our focus going forward will be on, and in this order, cost control, in particular in messaging and central functions, to profitability and cash flow, and three, growth. And I say this again in that priority. Those were my final remarks, and I now hand over to Thomas.

Thank you, Erik. Operator, may we have the first question, please?

Thank you. That's from the line of Perdag Savinovich of Carnegie. Please go ahead. Your line is open.

Thank you, operator. Good afternoon, Roshan, Johan, Erik, and Thomas. My first question is on cash flow, which was quite strong in this quarter. And Eric, in the chairman of the board letter, you explicitly state this was a big improvement. And that being said, you also say there's further potential. So maybe actually this is a question to Roshan, whatever you prefer. But on cash flow for the remainder of the year, do you think there will be more working cap buildup? Should it be neutral, further releases? What can you say on this topic? Because in the past quarters, it has been So intuitively, you could expect that Q3 could be less encouraging. So if you could be as specific as you can be on cash flows for Q3 and Q4, that would be very helpful. Thank you.

Yeah. I can try to answer that one, Roshan, here. I think as I usually say, I mean, the business happens every day, but working capital is measured at only four points in time in the year. So it's, of course, very difficult, you know, to give an exact prediction, you know, as you have quite large customers. I mean, the payment of one invoice a couple of days later can affect reported working capital. But all else equals and disregarding those kind of one-off impacts, I mean, we have had a working capital buildup during the last 12 months, you know, partly also led by prepayments for workers. for traffic costs that were made during Q3 of 2021. And this is a working capital build up that we absolutely expected to and expect to release during 2022 on a continuing basis. I think we have seen good progress here in the second quarter, but we're not completely satisfied yet, and we see more potential to further improve that. I think the long-term goal for us, of course, is to have a low working capital level and operate at a low working capital level across the group, and that's what we will aim for.

That's very clear. Thank you. And then just a question on the gross margin and specifically on the customer contract where you mentioned there's been price adjustments and there's been a drag on the gross profit growth from this renegotiation. So take it this is likely your largest customer, and by the sound of it, it's quite large. So I'm wondering, has this been a flat-out reduction, or have you gotten anything back? asking this in terms of have they committed to buying voice products or email products or anything like that in addition to you providing this price reduction?

I can invite Thomas in on that one. Thomas, do you want to make a start?

Sure. Thank you, Roshan. As Roshan mentioned, we have some very large customers who we've worked with and serviced throughout the years. We very much look for for a partnership model where we thrive when our customers thrive. We've had a long period of growth, including this particular customer, and we're very happy with that long-term relationship. We found ourselves in a situation where the customer had grown to a size that some price adjustment is warranted, given what the marketplace looks like. We choose to take the long-term view here to ensure that we can have continued positive growth with this and other customers. I think Roshan touched on this earlier. If you look at the full group, our largest customer is now around 5% of gross profit, and the top 10 customers account for 20% of gross profit in the second quarter. This is a change versus versus before where our earnings pool has been diversified. Going back specifically to your question, you can see that it's quite a clear effect on revenues, and it's 100% incremental margin, of course, on that shortfall. We believe we can come back to growth with this customer, but, of course, this is something that will weigh on us, you know, over the coming years, coming four quarters. Looking at profitability, you know, we think we are at a level which reflects the size and which is competitive. So, in that sense, you know, this is a good starting point for the future, and it's a very healthy relationship with a broadened product engagement. Hopefully, that gave some color, Fredrik.

Yeah, no, that's clear. But just on the final part of the question, will that customer, do you think or do you have any expectations of them buying from your other products in your portfolio having done this renegotiation?

That's certainly our ambition. We have a world-leading portfolio of products for both messaging, voice, and email. And of course, we'll take every opportunity, including this one, to increase the scope of our business with every particular customer, increase stickiness and add more value ultimately. So that's something we hope we can get back to more in the future.

Super. Thank you very much.

Thank you. Our next question comes from the line of Stefan Goffon of DMB. Please go ahead. Your line is open.

Yes, I would like to start with this price discount. You mentioned price discounts to large customers in Q1 2021. Was this customer part of that price discount? I mean, is it likely that we see other customers coming back here? Also, just to get the flavor, was the full impact from this price reduction visible this quarter, or will the full impact impact be visible first in the coming quarters? I'll start with that.

Thank you, Stefano. I'll follow up there. The impact is to the start of this quarter, so you are seeing the full impact of this price change from the beginning of this quarter. We have talked about price adjustments towards one of our largest customers Over the previous quarters, it's the same customer where we have made point adjustments to particular products, regions, and so forth. We came to the common conclusion that it's better to take a holistic view, secure a long-term partnership, and find a working way of cooperation that both parties are comfortable with, and that's what we've secured now. So this is an incremental change to some extent, but it's fully reflected in the quarter. In terms of other customers, we have a larger scale than most of our competitors. We don't necessarily like to win on price, but we rarely lose on price if that's what it comes down to. For large customers, price is an important part of a buying decision. And that's going to be increasingly the case in this new macroeconomic environment that we're entering. So price is often, of course, a part. However, on the messaging side, there isn't, you know, to my knowledge, anything similar in terms of large customers where we're in this situation where this type of adjustment would need to be warranted. Of course, hard to say what the future holds, but again – Our largest customer is around 5% of gross profit, and we think this is relatively isolated.

I think just to compliment Thomas before you maybe, you know, I think it's important to just call out again that, you know, as we said, our largest customer now is 5% of the business. So, you know, the potential for And we're not seeing a general trend. So, I mean, the potential for an individual price negotiation to have an impact as large as we see now is not, you know, is not large. I think your other part of the question, Stefan, was on the full impact. Yes, I mean, you know, I think we have seen the full impact in Q2, but I think it's important to remember, of course, that, you know, volumes with individual customers and to individual destinations can vary from period to period and quarter to quarter. So, you know, it's difficult to kind of, you know, exactly extrapolate. But, yes, we have a full impact, you know, from the negotiation in Q2. And then I think just following up, I mean, you know, as Thomas said, I mean, we have a broad discussion with our largest customers, and we definitely see a potential to kind of broaden the products that we're selling to our largest customers. And already in Q1, I think you saw an example where we had reported that one of our largest customers had bought, you know, an email, a small transaction, a small deal, but, you know, had bought emails from the Pathwire product portfolio. Back to you, Stefan.

Yes. Then a little bit on the acquired entities. We did see the EBTA margin coming down in IntelliQuent compared to previous quarter. I'm just wondering why this is happening. Are you increasing the workforce within IntelliQuent, or why do we see this situation?

Yeah, I mean, I think there's, again, you know, this is more to do, you know, think the known, the challenges, you know, when it comes to 8YY, we have talked about, of course, and, you know, that reform, kicked in in July of 2021, and there is a next step down in July of 2022. So, in Q2, obviously, you know, we continue to see the 8YY impact. In addition to that, I think the kind of decline in margin is more related to phasing, you know, rather than any specific rather than any specific business impacts that are affecting margin in Q2.

And then, well actually, you mentioned that the 8YY reform reduced the gross profit growth with 9% in Q2, and that was the same in Q1. So now there's a new step down, but can you comment a little bit on what we should expect in terms of impact on the gross profit growth?

Thomas, do you want to take that one?

Yeah, sorry, if you just help reiterate which segment were you referring to?

No, this is the boys, and you mentioned that the 8YY reform reduced cross-profit growth with 9% year-over-year in Q2, and that was the same as in Q1. Now there's a new step change, but you're also facing easier comps, so just to understand the headwind in the second half.

Sure. So the headwind will ease somewhat versus today, which means that all else equal, the revenue and gross profit growth should improve in the second half of the year compared to what it was in the first half of the year. Then I think looking at Q2, a little softer than Q1. So bear that in mind. But incrementally, the the COVID, sorry, the 8YY headwind is easing in the second half of the year.

And then just finally on the Pathwire, you had a migration to a new cloud email platform. When will that be done? When can we see a return to a higher gross margin?

So that work is ongoing and progressing well, but it's quite complicated. It's a full shift of infrastructure provided. It will be completed during the second half of the year, so you should hopefully start to see some benefit in the last quarter. And that should from this level lead to to some margin recovery in email.

That's perfect. Thank you.

Thank you. Our next question comes from the line of Andreas Jovson of Gdansk Bank. Please go ahead. Your line is open.

Good afternoon, everyone, and thanks for the presentation. I have very much respect for that the outlook is uncertain given the macro scenarios, but I guess you have done some scenarios of where things could end up and just curious when you look at a quite bad scenario, what kind of tools do you have to still deliver gross profit growth from an organic point of view and an organic adjusted EBTA growth? for maybe when we look into 2023. Yeah.

You know, thanks, Andreas. I think this is a good question. Obviously, I mean, we don't, you know, kind of, we don't share any forecasts going forward. But I think, you know, this is a question that we can kind of reason around a little bit, right? And, I mean, the way we are, when we are looking at the market today, and if you break this down into the different segments, I mean, you know, essentially... We see good continued growth in SMB in the U.S. market and still growth in the home markets of Australia and New Zealand, but not as strong as in the U.S. market. Now, remember also that a large part of the SMB You know, kind of customer base is, of course, more of a long-tail nature. So there are customers that are buying online, and therefore our customer concentration is not that strong. And, you know, we have the possibilities to – we have the diversification in that customer base. So the growth is really coming from a broad base of customers. On, you know, the same is partially true also for email. I mean, you know, where we are taking cost actions by migrating hosting providers. And right now, we have a slightly depressed gross margin due to having duplicate costs for hosting providers, which should then release, as Thomas said, you know, later on this year. And we will see the impacts of that hopefully during 2023 if the kind of technical project is completed during this year. And then when looking at voice, I think here the potential for us is more kind of expanding the voice customer portfolio to enterprise customers from the more traditional perspective. you know, from the more traditional customer base that IntelliQuint has enjoyed, which, by the way, is performing quite strongly as well, you know, when looking at it excluding the 8YY reform impact. But I think there's quite a large potential to kind of cross-sell voice to our messaging and email enterprise customer base. And then on the messaging side, you know, which is a little bit the – has been the concern, of course, from a gross profit growth perspective during the last three quarters. I think it's important to remember that, you know, as we've said before, that our growth has been fairly concentrated, you know, which we have been talking about, even though in our base we have a number of our customers that the growth came from a fewer number of customers. Now we're, of course, seeing that, you know, as the business from these customers has grown and scaled, I mean, we're seeing effects from price renegotiations. And also we have, you know, continued impacts. We started during last year from kind of the situation in LATAM where there is, of course, a macroeconomic factor, but it's also our own development, our own business development that contributes to it. Now, looking at the rest of the business within messaging segment, I think we have some positive sides as well. I think when we talked about India, for example, the last two quarters, we have talked about the impact of additional cost from operators for digital ledger technology. But we see here in Q2 a slight recovery on the Indian business and good growth. We also see that other segments of our customer base you know, are growing well. And I think, you know, that's what we will continue to focus on, you know, under the leadership of Johan to kind of make sure that we focus on the right opportunities that deliver growth in the short term, so to say, as Johan said. Anything that you'd like to add? Okay. Andreas, I think that was it.

Okay. Just one final from me. Is there any debt that is to be refinanced or repaid or any additional acquisition purchase prices that will be paid within the next year or so?

You know, again, I don't think there are any material additional purchase prices that are outstanding, you know, firstly. And then on the debt side, we, of course, have the obligation, which has an incurrence test at a leverage level of 3.25. Now, there are slight differences between how that is measured and, you know, the reported net debt is measured, but that incurrence test is only triggered if we take up new debt, so it's not triggered otherwise. And, yeah, so, I mean, at this moment, we're still under our thresholds, so to say, but, of course, going forward, you know, super important to keep our focus on profitability and cash flow. Again, As I said earlier in my comments, I mean, we have about 40% of the debt is U.S. dollar denominated. And, you know, the fact that the U.S. dollar has moved quite strongly from Q1 to Q2 is, of course, increasing our net debt as well. So that has some net debt impact during the second quarter.

Perfect. Thanks a lot.

Thank you. Our next question comes from the line of Daniel Tolson of ABG. Please go ahead. Your line is open.

Yes, thank you very much. I think it relates a little bit to Andrea's first question here, but just to understand how the new strategy or at least the prioritization that Eric presented in the beginning will affect the business in practice. What type of growth opportunities will you prioritize less as you change the priorities stated out now? Are there any regions like Brazil or you mentioned as a tough market that you may may you know reduce your efforts in or any type of businesses like big price sensitive tenders anything you will change practically for us to understand where you're moving from here thank you for that question i think a few different things and and

Johan will, of course, and we will come back with more in upcoming quarters. Of course, one aspect is just generally to focus and to focus in areas where the payoff is relatively immediate to, you know, all things equal, you know, to increase focus on a bit more mature products while still protecting investment in other areas. But that's a balance at any point in time, and of course, competition is facing similar or even harsher priorities, which also affects the situation. When it comes to Brazil, it's a quite specific situation where we have a detrimental development that we need to address. Part of this is, of course, related to the overall market, and part of this has to do with our execution. Of course, as we touched upon earlier, it's uncertain. The overall message should be that we need to safeguard our financial performance to continue to deliver profitable growth regardless of the macroeconomic outcome.

Yeah. I think just to, I mean, just give you one very concrete example, right? I mean, you know, I think as I've said, we've said in previous calls that, you know, we've acquired Pathwire who are, of course, you know, besides that they have a strong email product portfolio, they're also very strong on the developer go-to-market. This is something that Cinch has not invested in before. Now, taking a mature product like SMS to the developer go-to-market has, you know, tremendous advantages. And that is, you know, a product investment that we would, for example, weigh against investments in RCS or in conversational messaging and look at balancing those, you know. So I think that is just one such example of questions that we would need to evaluate further.

Yeah. Okay, I see. That's helpful. It will be interesting to hear in coming quarters then to see what you decide to prioritize here. My second question is on another topic. I mean, you said very clearly on here in the beginning that you feel confident with the business composition you have and post the acquisitions made in 2020. But I still have a question on potential divestments here. Have you discussed internally? to divest any of the recent acquisitions that you have found out that synergies are limited, integration is difficult, just creating a more complex business. I mean, given that your own valuation and the share is down so much in a year, that could ironically create value and also address some key issues that the depressed valuation reflects today. I mean, take Pathwire Intelligent Message Media, for example, which you acquired for more than 10 billion SEC less than a year ago. divesting one of those for half of the value, theoretically, would reduce your net debt by 50% to 75%, and also be at a higher multiple than you're trading at as well, which would then create value for shareholders, and also take away the depressed multiple you have on your share as well. Is that something that you at least have discussed internally at all, or is that totally way out of this world?

Yeah, I mean, you know, I think it's a good question. Obviously, we're evaluating all our businesses constantly, and, you know, we're looking at it, the questions. When we have and if we have any conclusions, you know, we will let the market know. There's nothing to say at this point in time. Maybe Eric wants to add something on this question.

Well, I can make a short comment on this, and the simple answer is no. We have not considered or addressed this at all in the board. We are always involved when we come to these type of discussions. We think that we have a very good, we think that the acquisitions we've done are all very good. They're in line with our strategy. And we also think today that, and I agree with you, that our share price is depressed. But we do think that over time we will recover. And we think that the strategic position is very good that we have today with the acquisitions that we've done.

Fair enough.

Thanks for that. Okay. Can we have the next? I think we need to speed up a bit, otherwise we will lose time. So please just pitch your number of questions.

Okay. That question comes from the line of Daniel. Please go ahead. Your line is open.

Thank you, operator, and hi, Roshan, Eric, and Thomas. I was wondering a bit on the COSEM program, the $300 million program. if you can comment on the cost deploy list and also the cash flow impact, how it will be impacting quarters coming, how much will be in 22 and 23, for example. Thank you.

Yeah, I think I'll keep the answer short, Daniel. I mean, you know, I think we're in an early phase of analysis, and we don't have at this point in time any information to share on kind of the cost to deploy the program as well as, you know, kind of the phasing of savings. I think what we've said is we'll reach the full impact in Q3 23. So we'll keep that at that level for now.

Perfect. Another question for me. would be on the integration cost. Part of this cost reduction might be, I guess, within integrators and cost being 250 million over the last 12 months. And there's still a high of 66 million in Q2. And obviously, we understand it's been higher on back of a lot of acquisitions here in 21. But how much, what would be a decent run rate, do you think, in the company going forward, if it's possible to comment?

Yeah, I mean, the majority of these integration costs are related to the messaging segment and to migrate platforms within the messaging segment, which is going to be a key driver of savings going forward as well. We expect the majority of these migrations to be completed in you know, by the end of this year, early next year. So, in that timeframe, we expect these costs to go down. We're not providing specific forecasts on the level of those costs.

Perfect. So, this is also with regard to SAP or the SDI interconnect.

SDI and Wavy, SDI, Wavy, and PWW migrations are significant drivers of the integration cost, yes.

And would you say that you're on plan with these in terms of timing and so forth or issues in this integration? Perfect.

I mean, technical projects are always challenging. So, you know, I think our plan has been and it remains to be to complete this year by the end of the year. You know, let's hope we can keep that.

Sounds good.

Thanks.

Thank you. The next question comes from the line of Antus Waschmeister of SCB. Please go ahead, your line is open.

Hi. Sorry, I'm at an airport, so it's a bit noisy. I just wanted to have a quick – it's very interesting to see the split now between the SMB and the larger clients in terms of gross margin. And I'm wondering, do you have a good grip on – You know, I'm sure that the large clients give what we in Sweden call teknisk bidrag, which is, you know, they contribute to a portion of the general cost of the business. But do you have a grip on, because generally what I feel is that large clients also demand a lot of attention. Do you think that your margin in the large customer segment is sufficient to cover its part of VBK so that it's actually not profitable in the app, rather than just, you know, pulling a bigger cost base. That's my question, actually.

I can start off with that one, Pontus. I think we have very clear profit objectives for each one of our business units and every one of our segments. Just to repeat that, with a very clear focus on profitability, And it's not the case that one part of the business is going to subsidize the other. As you rightly point out, we try to clarify the segment reporting and show you the business in the way we run it, which is also, of course, how it should be done. And I think from, as you allude to, it's pretty clear that we're seeing quite a different development across the group. The focus for us now is to fix the problem where problems need fixing and to continue to run the business well where the business is already performing well. And hopefully that will show in the numbers as well.

Okay, thanks.

Thank you. The next question comes from the line of Andres Moku of Berenberg.

Please go ahead. Your line is open. Yes, hi, everyone. Thanks for the presentation and for taking my questions. I have three. I'll pose them quickly. The first one is basically a repeat of the question I asked last time. Are you thinking of having an independent audit review, or is that completely out of the question? That's the first one, and then I'll pose the other two.

I can take that one. No, we're not thinking of an independent audit review. Okay.

And then on the interest rate on your debt, can you just confirm what is the annualized rate and that the underlying interest rate has not actually changed aside from the change in title?

I can confirm that's the case from Q1, yes. I mean, we did some refinancing, which we announced in market, and, you know, obviously that's the basis for our financing now, yes.

Okay. And then your annualized interest rate is how much, more or less?

Yeah, I think I don't have the number right at my head, but it's, you know, I think on an effective basis, it's slightly north of 2.1, 2.2% in that range.

Okay, great. And then the final from me is on your analysis. crude revenue for the quarter. Why has it declined so much compared to history? Is it because underlying growth has actually slowed down or is it because of cash collection?

No, I think it's primarily due to percentage of completion levels being reached. Crude revenue, of course, is revenue that we have recognized but where there is not an unconditional right to payment. then depending on, you know, when milestones as per customer contracts are completed, you know, those accrued revenues will become, yeah, in the most case, typically billed receivables, right, before they're paid. And, you know, and since this concerns a smaller portion of our business, I mean, the majority of these revenues come from a smaller portion of the business, it can be a bit lumpy from quarter to quarter. Mm-hmm.

Okay, thank you very much. That's all from me.

Thank you. And we currently have one further person in the queue. That's Deepshika Agarwal of Goldman Sachs. Please go ahead. Your line is open.

Yeah, thanks for taking my question. I have three. I'll just try and keep it short. So first one is, please can you comment on the phasing of the organic gross profit growth for the remainder of the year? Could it still be negative in the second half? And what does the path look like for the acceleration of the same in the year 2023? Will it still be back-end loaded? That would be my first question, and then I'll follow up with the next one.

Thank you for the question. We do not issue guidance. Sorry, there's a bad echo here. I'll pause and try again. Try again. So, thank you.

Sorry.

Hello. Yeah, then I have a follow-up on that large customer. I just wanted to understand, like, you know, there was an impact in this quarter. How should we think about, like, it was asked, but then should we, like, should we extrapolate the same impact for the next coming quarters or it will vary from quarter to quarter going forward?

Thank you. I'll try again now.

So you're talking about the impact from price change to one of our largest customers. You're seeing the full impact in Q2, and you will continue to see that ahead. Then, of course, offset by any underlying continued growth. In terms of phasing for the rest of the year, which I think was your first question, we don't issue guidance. But we reiterate our target of 20% growth in adjusted EBITDA per share.

Okay. And just the last one. So leverage adjusted for visas is up to 3.3 times versus 3.1 times in the previous quarters. Like, does your covenant calculate even the including or excluding rent expenses? And at what level is your first maintenance covenant?

Right. So, again, you know, I think obviously the main driver of the leverage increase, you know, we've taken down net debt, but it's, you know, it's the development, of course, that's the main driver. Right. you know, it's got to do with also the fact that due to the reassessment of reserves, we've had a hit on it every day during this quarter. When it comes to the question, you know, again, we've not disclosed our specific governance previously, and we don't intend to do that. I mean, that's in our contract, suffice it to say that our goal is to keep leverage below our target level of 3.5. And that's also one of the reasons why we are bringing in a cost reduction program to make sure that we increase profitability and manage cash flow.

Okay. I think those were my questions. Thanks so much.

Thank you. And as we have no further questions in the queue at this time, I'll hand the floor back to our speakers.

So Thomas, you want to close?

Thank you very much, everyone, for participating in this conference call. Any follow-up questions, please don't hesitate to reach out to Investor Relations through the investor's email address. Thank you very much for the attention. Looking forward to meeting you again in the future.