Sinch AB (publ)

Thank you very much, operator, and good afternoon, everyone. Welcome to this earnings call where we present the Q1 2023 results for Cinch AB. My name is Thomas Hilt. I'm Chief Strategy Officer and Head of Investor Relations. With me today, I'm very pleased to say, is our CEO, Lorinda Pang, alongside our CFO, Roshan Saldana. And with these opening remarks, I'll ask the operator to move ahead to slide three for some opening remarks from Lorinda.

Thank you, Thomas. Good afternoon, everyone. It's such a pleasure to be with you today. And as I've been in the role for just under two weeks, Mersin will cover the detail around our results for the quarter, and during the Q&A session, he and Thomas will answer most of your questions. But with that said, I thought it was important to share some of my thoughts this morning and to properly introduce myself. You might be wondering why I'm excited to join Cinch, and there are three areas that I evaluated to answer this very question for myself. The industry, the company, and the role. First, the industry. I've spent most of my career working with enterprises around the world, and what I know to be true is that for them to compete and win in their respective markets, they must digitally transform. And I know that's an overused phrase, but the reality is that today's consumers are extremely demanding. You and I, as consumers, have huge expectations. We expect speed and ease. Consumers are not lowering demands. Rather, they will continue to expand and accelerate. So for enterprises to compete and win, companies must make their products and experiences easy and fast for us to consume. Cloud companies who enable omni-channel communications are more than simply relevant in this equation. They will continue to play an important role in the ecosystem of enabling enterprises to meet their business objectives around growth and efficiency. In fact, we can all see the analyst's report. who say that some segments will grow impressively in coming years. Of course, given the variations of products within CPaaS, some segments will grow faster than others, and we all know we are facing challenging macroeconomic environments. Next, I looked at the company itself. We talk about Cinch as a CPaaS player and as a communications cloud for customers. We fit both of those labels, but I also see Finch as a customer experience company who is well-suited to address the needs of the market, as I described just a moment ago. Finch makes it easy for enterprises to maximize opportunities across every phase of their customer's journey. The strategic investments and acquisitions we have made, particularly in the past two years, are both compelling and comprehensive. This is a company that has been profitable since day one. has a set of founders who are visionary yet humble, a board who is engaged and committed, and over 4,000 colleagues around the world who operate with a core set of values around trust, respect, and collaboration. This collection of talent, culture, and technology portfolio is our competitive advantage. These are the right ingredients for reaching our potential for both organic growth and continued consolidation. Finally, the role itself. The question I ask myself here is, do I fit and can I have a meaningful impact to help reach its ambitions? I've answered yes to both of those questions. And here's what you should really know about me. I'm customer-obsessed. I'm employee-oriented. I've been leading transformations across large-scale organizations for many years. I've led commercial and operations teams around the globe. I'm demanding about operational excellence because I believe in the power of operational discipline, delivering efficiencies, and more importantly, it enables exceptional experiences for our customers. So in summary, my background has prepared me well for the honor of leading Finch today. Operator, could you please move us to slide four? I'm not prepared to unveil a new strategy or commit to new deliverables at this time. And in fact, it's really important to know that our strategy and key commitments remain intact, meaning that we continue to focus on cost control, cash flow, and organic growth. However, I am happy to share some of my initial thoughts on how we progress in these important areas and where our opportunities are to create value. So for today, I'll highlight two. Integration is highly complex and cannot be considered a monolith. When describing integration programs, I often talk about the need to solve a Rubik's Cube. We need to solve across infrastructure and core IT systems, product platforms, mastering data, harmonizing processes, account assignments, incentive systems, and the list goes on. And by the way, we also need to execute against all of these so well that we ensure our customers are not impacted negatively. These are not easy, and they do require strong planning and governance. We have an opportunity to improve our integration execution. Go-to-market strategy is another area that requires more attention and better execution. Starting with customer segmentation, who are we targeting and with what products and solutions, and how are we going to sell and support these customers? Just as integration cannot be considered a monolith, nor can the enterprise customer segmentation. There are specific personas within enterprises that we need to design our selling motions towards, including developers, marketeers, operational, and business leaders. And as such, our Cinch platform is integral in our go-to-market strategy, in addition to traditional selling and customer success motions. Integration and go-to-market are top of mind for me and the rest of the team, and we're urgently assessing our plans here along with other value creation opportunities, and I look forward to sharing a more comprehensive plan with you in the future. Until then, thank you for joining us today and for giving me this opportunity to speak with you. I'll hand it over to Roshan now.

Good afternoon, everyone, and thank you, Lorinda, and welcome again to your first earnings call at Cinch. Let me begin by summarizing the first quarter if we move to slide five. We identified three priorities in Q2 2022, which are cost control, cash flow, and growth, and we are executing accordingly. We are pleased to see that cost development is in control and in line with actions taken. Adjusted OPEX has reduced by 4% in constant currencies, excluding one-offs, in the quarter versus the second quarter of 2022 when we started the cost reduction program. If we look at the fringe parameter prior to the 2021 acquisitions, Adjusted OPEX has reduced by 6% over the same period. Net sales grew 6%, gross profit by 8%, and adjusted VDA by 10% year-on-year. We have a diversified business, and several segments grow well, while others experience challenging market conditions. However, on the overall basis, margins are slightly increasing, with gross margin going up one percentage point to 33% in the quarter when compared to last year. We've also taken the next steps in integration and implemented organizational changes and launched a combined leadership for messaging and email to accelerate product integration and unlock cross sales potential across regions and customer groups. I'd like to remind everyone that this is a clean quarter, no acquisitions during the last 12 months and hence we have the same parameter in Q1 2023 as in Q1 2022. Our leverage ratio, which is net debt to adjusted EBITDA, excluding impact from IFRS 16 leases, remains stable at 2.7x. We're also excited about bringing to market an application suite to enable enterprises to deploy conversational messaging within marketing and customer care. This is a true integration success, building on functionality from Messenger people and chat layer, as well as leveraging Syncios conversational API. Moving on to the next page. When we look at Q1, we can conclude that we continue to see positive effects from the cost reduction program we launched in Q2 last year. The chart shows how adjusted OPEX has developed. Adjusted OPEX is defined as the difference between gross profit and adjusted EBITDA. The yellow parts show OPEX added from acquisitions in late 2021, whereas the green part shows the organic development, where you see a flattening out after a short increase from early 2021 to early 2022. Total adjusted OPEX in Swedish kroner is 1% lower in Q1 2023 compared to Q2 2022. in constant currencies excluding one of items it is four percent lower a cost reduction program launched in the second quarter targets primarily the green area on the chart which is the cost base before the acquisitions at the end of 21. looking at this cost base it has nopex is down six percent in local currencies since we launched the program again looking at q123 versus q4 2022 sequentially Costs are lower. This is true also for the green part of the chart when you add back the 60 million Swedish kronor of one-time items that we called out in Q4 2022. We have also called out a resolved provision related to legal fees invoice, which benefit OPEX with around 35 million SEK in the first quarter 2023. Let's move on to the next page. Page 7 shows a bridge explaining our underlying gross profit development. In Q123, we had organic gross profit growth of minus 1% across the entire business. Excluding the impact from a previously communicated price change to one of Sintu's largest customers, organic gross profit growth would have been positive. Since there have been no acquisitions during the last 12 months, we don't need to look at performer development. Gross margins were 33% up compared to 32% in the comparison quarter last year. The Swedish corona weakening against major currencies has helped gross profit growth by 189 million, or 9%. When speaking to the individual segments for messaging, organic growth in gross profit was minus 8%. Again, excluding the impact from the previously communicated price change, organic gross profit growth would have been at plus 3%. Messaging volumes were up 2% year-on-year, which have been affected by the economic downturn. Lower volumes of traffic from large senders who have been sending at low margins and reduced domestic traffic in Brazil, where we continue to lose share. Turning to voice, organic GP growth in the voice segment was at minus 2%. This includes a negative effect from the 8YY regulation change in the US, which is 4%, without which we would have been positive at plus 2% organic GP growth. And the number verification business continues to be a strong contributor to growth in the voice segment. In email, Organic GP growth in the email segment was 23%, driven by new customer acquisition, volume growth, and improved gross margin from moving to a different cloud service provider. Within SMB, organic GP growth in the SMB segment overall was 2%. However, we see that we have extremely strong growth in the U.S. market and in the online self-serve businesses. which is offset by slower growth among larger customers, larger enterprise customers in Australia. Turning to page eight, this slide shows pro forma figures for Q3 and Q4 2021 to ensure compatibility and shows the gross margin and adjusted VBA margin developments over these quarters. Gross margin stability shows the strength in our product proposition towards customers. We believe we can improve this over time as the higher margin products are growing faster. In Q2-22, as you know, gross margin and gross profit was affected by a reassessment of reserves for accrued traffic costs by $162 million, which affected both gross margin and adjusted GDPR margin. Again, stable gross margin over a longer period of time is what we see on this page. And there is, of course, some difference in seasonality between affecting gross profit and OPEX as well. Moving on to slide nine, which shows our income statement. What's calling out here is that we have currency effects affecting revenues, gross profit, and EBITDA. When we compare reported and adjusted values, the largest adjustment items between EBITDA and adjusted EBITDA is integration spend at 47 million Swedish kroner. This relates mainly to integration of platforms in our messaging segment from previous acquisitions and in our SMB segment, the migration of simple texting onto the message media platforms. We also have some operational foreign exchange rate losses and a small earn-out payment related to tax items in Brazil from the acquisition of TWW. Depreciation and amortization of 605 million SEK per quarter includes non-cash amortization related to acquired assets, and that non-cash amortization is 496 million SEK. Adjusted EBIT grew to 725 million SEK, excluding EBITDA adjustments and the amortization of acquisition-related assets. Net financial expenses were 162 million SEK in the quarter, with interest costs amounting to 633 million, which gives us an effective interest rate of close to 5%. The group's effective tax rate in the quarter was 3%, which is lowered by recognition of deferred tax assets and rematured deferred tax balances due to changed tax rates. Please turn to page 10. A clear focus for CINCH, I mean, one of our top three priorities has been cash flow, and within that has been reducing our overdue accounts receivables. This graph shows days sales outstanding and includes all of our accounts receivables, both billed and unbilled, as well as accrued income, and also includes pro forma net income. DSO was down in the quarter at 56, which is down from 60 in the fourth quarter, and this has been possible due to continued focus on recovering outstanding customer receivables. Moving on to slide 11. where you will find a bridge from adjusted EBITDA to cash flow before changes in working capital and to explain the effect between these items. As in the previous quarter, we calculate cash conversion after capex, tax payments, and interest payments. Normally, over a longer period of time, we believe this business should be in the 40% to 50% range. Last year, we had a release of working capital, which helped cash conversion. On a rolling 12-month basis, we have at the end of Q1 2023 a cash conversion of 60%. However, in the quarter, cash conversion was at 7% caused by decreased accounts stable and higher paid interest. Also, paid taxes tend to be seasonally higher in Q1. Please note that working capital can be a bit lumpy, as we have large enterprise customers. A payment from one of our larger customers ending on the right side of the quarter end can affect this KPI significantly. Please turn to the full cash flow statement on page 12. Note that we paid down debt by over 300 million Swedish kronor during this quarter. Cash flow from operating activities for the quarter was at 212 million Swedish. We have a strong financial profile with a diversified earnings pool and also networking capital as a percentage of sales continues to be low, which shows the asset-light nature of the business. The group had a closing cash balance of 1.9 billion SEK as at year-end. In addition, we have available bank overdraft facilities of SEK 911 million. Please turn to page 13, where you see net debt over adjusted VDA, our leverage measure. Three components affect net debt over adjusted VDA. Adjusted VDA growth, cash generation, and also the immediate currency impact on debt with a trailing impact on earnings. in the quarter we are happy to see the flat development of net debt to adjust the dpa we expect to continue deleveraging this during 2023 and from both from earnings growth and cash generation Turning to page 14, we reiterate our unchanged financial targets to grow adjusted EBITDA per share with 20% per year and to keep net debt over adjusted EBITDA below 3.5x over time. Adjusted EBITDA per share grew 55% in Q1 2023, measured on a rolling 12-month basis, and net debt to adjusted EBITDA is at 2.7x, which is well within our financial goals. and a reduction from 3.2x as at the end of the third quarter 2022. For the last 12 months, there is no difference between pro forma and reported FTA, but the KPI excludes the impact of IFRS 16 related leases on both net debt and adjusted FTA. Turning to page 15, I'd like to reiterate the priorities that we set out in the second quarter of 2022. We continue to work with cost control, cash flow, and growth. Looking at our entire business, we have a healthy business with stable and slightly growing margins and a very diversified earnings pool. There's still potential to extract for the cost and revenue synergies from the acquisitions closed in late 2021. With this summary, I would like to hand over to Lorenda to highlight some of our recent announcements about our partnerships with the world's largest global tech companies. Please, operator, please move to page 16.

Thanks very much, Rishan. So partnerships and ecosystems are important ingredients to any go-to-market notion, and that is true for Cinch here. We are uniquely placed to serve large global cloud platforms who want to make customer communications a part of their offering. A few reasons why that's true. Our customer communications cloud covers all the most relevant communications channels that business use to communicate with their customers. We handle hundreds of billion interactions across messaging, voice, and email. We support both established technologies like SMS messaging and emerging channels like WhatsApp and Apple Business Messages. We operate the largest independent voice network in North America, and we control our value chain with direct connections to hundreds of mobile operators, which improves our delivery rate, shortens latency, and ensures data remains private. So during Q1, we've announced important partnerships with Salesforce, Adobe, and Microsoft. Let me talk through a few of these, or actually through all of them and explain why. Together with Salesforce, we ensure that businesses can communicate with their customers throughout the world using SMS and new messaging channels. We've worked with Salesforce since 2014 with product teams in active engagement to align roadmaps and deliver new functionality. We also have a strong relationship with Adobe, and we recently were awarded Adobe Digital Experience Technology Partner of the Year Award for Customer Journeys. With Adobe, we have built out some very innovative functionality for conversational messaging where they leverage our capabilities across multiple communications channels. Here we also have a new partnership model where Adobe resells our product, which is a step up from our previous engagement with them. Turning to Microsoft, we enable businesses to use their Microsoft Teams product to call and receive phone calls through the regular PSTN voice network. Here we make two announcements. One about enhancements to our products that make it easier for third-party system integrators to help set up and configure voice calls in Teams. A second related announcement calls out our cooperation with one such partner for professional and managed services. Moreover, we also work with Microsoft in different use cases, leveraging other products than voice. Of course, there are many more customers and partners beyond those we showcase on this slide. Engaging with customers is one of my top priorities as CEO, and I've had the opportunity to have several calls this week with customers. As an example, I had a great conversation with a leading European MarTech company just yesterday who uses us for SMS and now looks to switch to Cinch also for email. They send around 700 million SMS messages per year on behalf of their customers, and we are one of two suppliers to them. But they also send more than 10 billion email messages, a service they are currently buying from a competitor. And as we now have capabilities across both messaging and email, we see opportunity to significantly increase the scope of that particular engagement and relationship with that customer. I would say that each of the conversations that I've had with customers this week have reinforced the thesis around since building and acquiring or through acquisition, building a portfolio of services across all communication channels. The customers see the value proposition. They are excited about the portfolio of services, and I am really looking forward to helping to take Finch to the next level by leveraging that entire portfolio on behalf of our customers. So with that, I'll turn it over to – or, operator, I'll ask you to start us into the formal Q&A session.

Thank you. We will now begin the question and answer session. To ask a question, you can press start, then 1 on the telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Start To. At this time, we will pause momentarily to assemble our roster. First question comes from the line of Akhil Dathani from JP Morgan. Please go ahead.

Hi, good afternoon. Thanks for taking the question. Could I start just really... asking about the trends we're seeing at the moment and just maybe how we should try and think about them. So there's two parts of the question. One is you've now reported two quarters of negative trends. I'm trying to understand how we should think about it. I mean, it's clear that there's a macro element to this and the economic environment is unhelpful. But if we look at your peers, they still seem to be reporting double-digit growth rates. So I'm just trying to understand what you think the difference here is. Do you think it's that those operators are just behind the curve and they'll ultimately see the same trend as you? Or do you think you're underperforming? And if you think you're underperforming, why do you think that is? And then the second part of the question is really about how we think about the look forward. Obviously, we know that comp should get easier over the next couple of quarters due to various items you've been highlighting over the last 12 months. I wonder if you could remind us of how big those comp items are. And I guess ultimately, what I'm trying to understand is, do you think that's sufficient for trends now to stabilize and accelerate? Or does the macro make it too difficult to call? Thanks a lot.

Okay, this is Lorinda, and I'll kick off, but then I'll turn it over to Rosham to finish out. With regards to the past two quarters, I would say in Q4, we did talk about the headwinds from a macro standpoint. But in Q1, I wouldn't say that anything has worsened necessarily, but certainly we have a full quarter impact of those headwinds. So I think that's what you're seeing, you know, different sequentially, if you will. But I think what's really important to note is that demand is still very much there. And we see that in the form of new customer acquisition. And you will have seen in our report today that email specifically, GP, has grown by 23%. On the messaging side, even though we have a large base on the messaging side, which has been impacted, with regards to macro, we do still see new customer acquisition in that part of the business. Our SMB business in the U.S. very specifically continues to grow very nicely. So I think that we have a bit of a tale of two cities, if you will. First is, you know, the larger base that is is being impacted by the macro, but we have the other parts of the business that are poised for substantial growth go forward.

Thank you, Lorinda. I think that was great. If I were to expand a little bit first on those, I think As Lorinda said, we do have parts of the business that grow well. I pointed to email. I think you can look at the online self-serve business within SMB. We have a similar trend. I also think gross margins are stable to increasing, which is a positive sign. Where we see the impact is primarily within transaction volumes from larger enterprise customers in messaging and both in the messaging segment and to the extent we have large messaging customers in SMEs. where we've seen kind of volume reduction. I think actually commenting on the comparison you made competition or industry, I mean, in our industry, you have several different companies that differ from each other in terms of the offering. what we can see um in terms of looking at the market in general is that whatever growth rate that that the company has had you know going back two three quarters they have definitely decelerated from that level the levels have been different um and um you know our understanding is that that we we we're not losing market share rather you know we we see in terms of signing new accounts and growing with existing customers by adding new products. We have continued strong development. We signed 37 new customers within messaging. We sell large enterprise accounts the last quarter, and that's been fairly stable. There's a bit of a seasonal effect, of course, but that's been fairly stable over the last four to five quarters. We have reported a hundred. And then maybe, just to close off, as I said in my remarks, if you exclude the price negotiation impact, we would have had positive growth overall in Q1, and in messaging, we would have had organic loss-profit growth of plus 3%. I think you can calculate the impact from that KPI. The look forward, we're not providing guidance. There's a number of puts and takes. Obviously, as you correctly identified, we have both the price negotiation and the the one of reassessment of traffic costs working in our favor in Q2, but it's difficult to call kind of how exactly Q2 will turn out at this point in time.

Okay, thank you.

Thank you. Our next question comes from the line of Andreas Julesen from Danske Bank. Please go ahead.

Hello everyone. So many questions, so little time, but I limit myself to a couple. On prices, if we continue there, you've said that it's a little bit tougher towards the larger customers while there are opportunities among the smaller ones. Can you elaborate a little bit of how large these price increases are that you implement and if there are any new renegotiations coming up towards any of the larger ones. And secondly, maybe for Lorinda, you mentioned the integration execution opportunities. Where do you see those opportunities and what are your learnings from these couple of weeks when it comes to integration and what Synch has been doing so far? Thanks.

Yeah, why don't I start with the integration and then I'll hand it over to Roshan on pricing and renegotiation. On the integration side, you know, there's lots of ways to define integration. And we acquired so many companies, not only over the past two years, but over, you know, really the last 15 or so years. And So the group has done a really excellent job with regards to some of the product integration and platform migration work. Integration is complex, and it's much broader than just product alone. And by that, I mean it spans across everything from infrastructure, core IT systems, people culture, Salesforce integration relative to customer account management, incentive systems. So it really is quite complex and does take some time. So I would say that the platform migration has been underway, and we've seen some success there. And we know it takes some time, and so we expect that to continue. But we've not reached our full potential or taken advantage of the acquisitions themselves as it relates to the growth opportunities and leveraging the product portfolio across all of the customers that we serve. So those are some of my initial observations, Andres, and we'll be putting together some very structured plans and targets to achieve those growth opportunities.

And maybe I can take your first question second here, Andreas. I think when we look at the pricing negotiation that we had which affected our messaging growth starting from Q2 2022, we found that this is a customer that's been with us for many years and we have grown with this customer. And therefore, you know, we had pricing and margins that were maybe a little bit, you know, not relevant to the volumes that they, you know, kind of used us for delivering now, right? Now, when we look through our portfolio, and this is something we've commented earlier, we don't see any other large customers that have that situation. I think the other thing is that, you know, The macro impact has meant that many of our large customers have been looking closely at their larger suppliers and evaluating what opportunities there are to reduce prices. And if there were to be any such discussions, I would have supposed that they have already happened. And there's nothing that has had a material impact on us. um that being said i mean you know uh of course individual price discussions will happen from time to time but but when you look at margins um you know over the entire period that we have been reporting now seven seven quarters on a performer basis i mean they continue to be stable and they also continue to be stable within the individual segments so i think that's that's another indication of kind of pricing stability Now, on the price increase that we did, that was specifically in messaging. It was late in Q1, so the full impact is not in Q1. It's going to be more in Q2. We haven't disclosed a specific percentage, but remember that even a smaller percentage increase on top line results in a 5x impact on gross profit because of our gross margin percentage being 20% in the nestling segment. And I think the other comment is that this is obviously not in our entire base. I mean, this price increase was not done on our very larger customers, but rather on the next level of customers within messaging.

Very clear. Thanks a lot. I appreciate it.

Thank you.

Thank you. Our next question comes from the line of Fredrag Savinovic from Carnegie. Please go ahead. Thank you, operator. Thank you for taking my questions. My first one is to Larinda. Thank you for the intro. You did as well. And I know it's clear you spent quite limited time with the business so far, but I'm still curious if you during your time now or your own diligence of CINCH have found certain improvements you could do in sales processes? Is there anything you can add on acquisitions, organizational structures, or something of that kind? Have you been running similar things as your previous employer?

Thanks for the question, Padraig. It's your point. It's been just a few weeks, or almost two weeks at this point. And the organization as a whole has gone through a tremendous amount of change, including the sales organization. There's opportunity to leverage CRM differently. There's opportunity to leverage account planning collectively. There's opportunity to think about customer segmentation consistently across all areas of the business. With that, there is opportunity to leverage our digital channels as well more effectively by ensuring that our product portfolio and pricing capabilities are loaded in those digital tools so that customers can self-service. So there's a number of opportunities across the go-to-market that I see as low-hanging fruit to improve and become more effective. But I would also note that it's low-hanging fruit to suggest and make the changes. And then there's some time where that has to soak in, that new discipline has to soak into the organization. And, you know, and the opportunity to have different types of conversations, more comprehensive conversations with our customers, takes a little bit of time for the sales cycle to work its way through and for revenue to ramp against that. That being said, again, the digital channel piece, you know, that should be a quicker time to value. So, yeah. There's definitely plenty of work for us to do and to execute differently.

Thank you. And could you double-click a bit on the customer wins you've done? So you mentioned 15 to 4 on 40-hour messaging, and this is typically then the segment that serves quite large businesses, but without knowing anything of their size, This number doesn't give us that much at this stage. But what do you, Roshan or Lorenda, what do you expect from these wins? What should we expect here?

Yeah, I mean, you know, I think, Frederick, Roshan here, I think just a couple of comments maybe to give a little bit more time. What we disclose is, of course, the number of customers. The way we classify an enterprise customer is when they are above a certain threshold, and that threshold varies a little bit per geography, but overall it's around $3,000 in monthly gross profit, or at least that we have a potential to reach, you know, $3,000. a monthly gross profit at that customer. Then that's a lower threshold. Of course, that number could be very high in the case of individual customers, but usually there's a ramp up time as well. Now, what we've seen historically is that our business performance within messaging is more depending on the base. rather than on recent new ads or recent churn. And which is a little bit, you know, also speaking to the stickiness of customers, you know, of products in our business. So because of the ramp up time associated with enterprise customers, you know, they've been around a while before they make a material contribution.

Okay. That makes sense. Thank you. Thank you. Our next question comes from the line of Stefan Goffen from VNB.

Please go ahead. Yes, if I could start with a continued question on the pricing in messaging. So it's a mixed effect. You have pricing cases towards small customers, and there you clarified that that came in quite late in the quarter, so we should see full effect in Q2. But that was against also price pressure within the large enterprise space. Can you comment if we have seen the full impact there, or if you're still seeing continued price pressure from large enterprises? So should we expect an improvement overall? So I'll stop with that question.

Thank you, Stefan. Thomas here to try to give a little bit more color. uh the macroeconomic environment uh you know had some impact on our operating metrics at the end of q4 and what we're saying q1 is that you know it's been persistent not necessarily worse right so well you know just from that angle um it impacts the the the numbers in in q1 a bit more than in q4 now having said that you know q1 performance is quite similar overall to to q4 and One of the things that positively contributes, if macro is contributing a bit more on the negative side, one of the parts that is contributing positively is the price adjustments that we've made later during Q1 towards a set of our messaging customers. So you're correct that the full run rate impact, that's not seen in Q1, but we will see that in future quarters. When it comes to larger customers, of course, we called out one particular customer back in Q2. We've had some other such conversations, both in the messaging and the voice segment, which we talked about during the autumn. This is what we see again now. We've seen that realized in Q1, rather than indicative in H2. So not necessarily seeing further deterioration, But with that said, you know, of course, who, you know, we don't really want to speculate on macroeconomics. From what we know today, we feel we have those negatives on the full run rate impact right now at least. So, hard to speculate on the future. Some things we know will improve, and of course, that alone should ease or should improve performance in coming quarters.

Yes, thanks. Two very quick questions, if I may. So you're charging quite large integration costs each quarter. When are we seeing an end to the integration processes for these charges? And then secondly, the gross margin in the voice business is down two percentage points quarter on quarter. Is this due to pressure in the more high-emergency path business, or are there other explanations?

Yeah, so I think, I mean, on integration, I mean, what we're charging to integration today, primarily, I think we're at 47 million Swedish in the quarter, is the migration of the SDI platform and the LATAM, you know, the two platforms in LATAM from the acquisitions that we did there to our central messaging platform. and the migration of the simple texting platform to a message media centralized SMB platform. So those are the platform migrations that are ongoing. We do believe that within the next 12 months or so, we should be rounding off the majority of these migrations and most of the other costs of integration we actually take as normal OPEX, including investments in new ERP platforms, etc. Now, coming to your second question on voice margin, that is primarily a result of, as Thomas mentioned, you know, that as well as a mix effect. So it's really, it's several different things, you know, kind of playing into that, you know, in voice. We have some products that have a traditionally higher margin that are not growing as fast. And then we have the enterprise business within voice that is comparatively low margin, but growing much faster. So you kind of get a mixed impact of that affecting the voice margin.

Okay.

Thank you. Thank you. Our next question comes from the line of Daniel Duberg from Handels Banking. Please go ahead.

Thank you, operator. And hi there, Lorinda. Welcome aboard. And hi, Thomas from Russia. A couple of questions, if I may, here. Starting off, perhaps going back to North American messaging, revenues fell off some 18% despite hefty tailwind from currency inflation. and we know obviously this is coming from price negotiation with large big tech customers of course but can you give some more color on the volume impact in North America and also if this price negotiations have spread to other big techs given this large drop year-over-year?

Thank you Daniel. I think One of the reasons we call out this price negotiation or this change from Q2 is, of course, the financial impact, but it's also calling it out because it is quite unique. This is a large global tech company who we've worked with for several years, but we're truly seeing some outsized growth at a comparatively healthy margin. you know, eventually as the priorities shift, also with our customers, they will look to improve and change and focus a bit more on profitability versus growth. That's the sort of underlying reason. The background is quite specific to this one particular customer, so it shouldn't necessarily extrapolate to others. In terms of where we see discussions on price it's contained mainly to larger customers and those discussions were happening during autumn with the you know what we believe is the full effect during q1 in terms of volumes it's again specific to this particular customer which you know has a quite unique setup in how we cooperate we're not really sure exactly where that ends up As you know, 12 months will have passed since we made the price adjustments when we entered Q2, but we've also seen the volume decline. So annualizing part of that has changed. But you shouldn't really extrapolate this to any other customer, at least we don't.

Is it possible to give any color on the underlying volume on the rest of the customer base in North America?

I think, again, what we can see is that there is a trend among enterprises to evaluate their cost base and optimize. That means that it's also interesting. We do see some customers moving to our email products or using our email products more.

They're looking for alternatives. They're also

looking at ways to kind of reduce, you know, touch points since SMS has come with a cost. So there's a number of, you know, kind of different ways that they're using to optimize, you know, their cost base. However, you know, underlying that is a strong digitalization trend, and we continue to sign new customers and launch new use cases.

But in the short term, you know, there is a volume impact, right, as they kind of adjust their costs.

Okay, fair enough. And if I may, a question on the price increases you mentioned again. Stefan asked the question, impacting and quite late in Q1. Would it be possible to give a ballpark and comment on the impact? which would have been if this caused impact or caused... I think we had happened January 1st instead of late in the quarter on the cross-profit growth in the quarter from messaging.

I think we're unwilling to give any more numbers on that, other than to say that you're seeing a full quarter impact from macroeconomics, which was a partial impact before.

I think I would also, Daniel, if I may, I would just add pricing is a lever, and we have to be very sensitive to what the market will bear. And so, you know, we will take appropriate action whenever we see the opportunity or need to or, you know, if our costs increase for whatever reason. So, again, it's a lever. But as we think about growth in this business, you know, we will be focused in on the opportunity to cross-sell and up-sell our existing customers and to take market share. So I understand the reason why... You want to understand the impact of pricing, but just understand it's almost going to become a part of business as usual, but growth really needs to come through those other areas.

Perfect. And a super quick follow-up just to Russian on the finance cost and the interest cost outlook for the full year. Should we extrapolate on what you saw in the quarter, given that you have prolonged financing up until 2026? Or can you give any color on the interest cost?

Yeah, I mean, I think we have an effective interest rate of 5%. I mean, that's, of course, a bundle, right, of different interest rates. I mean, I don't have the crystal ball for how the benchmark ratio will develop. I think if you look at most of the banks, things will decline later in the year. But, you know, again, you have to look at that.

So I don't have more information than that to share. Thank you.

Thank you. Our next question comes from the line of Daniel Tartan from ABG. Please go ahead.

Yes, thank you very much and welcome, Lorinda. Two questions. First one on the peers. We see a clear profitability focus and leaving growth ambitions behind, obviously. Should we see that as a positive change in competition for you? Or is there anything else to read into that regarding mid-term growth in the market that they may that there may be a risk that many of you have overestimated the sustainable market growth that is being adjusted now by those peers. That's the first one. And then the second one on the email segment, is the strong organic growth in the current quarters a result of that product being a lower cost communication channel than a text message? So when we see messages coming back, could that be a headwind for email, or is that really to overanalyze the strength there?

I'll try and answer some of it, and again, the guys can add in. First of all, I think it's super important that we all remember that Cinch is profitable and has been since day one, and I think that's something that we're very proud of and will continue to be an important part of how we operate this business. That's first and foremost. The competition that you mentioned, certainly is striving for profitability, but it will be a long time before they get there, given some of the language that they've shared with the market more broadly. I don't think that their quest for profitability is because we have underestimated the market demands and the market opportunity. I think, quite frankly, that, you know, it's an economic reality that all businesses are living with today. The profitability is important. It makes logical sense, and so appreciate the fact that there's striving for it. Some of the actions that they've taken to achieve profitability or to step towards profitability are, does benefit us, quite honestly, because they're having to take significant costs out of their business model, some of which has impacted customers. And so if customers are experiencing that degradation of service, Finch is able to take advantage of that, quite honestly. And we service our customers in a way that is superior to what they've experienced with some of the competitors. And, you know, while we have a focus on cost, certainly, and will continue to do so, we have not had to take the dramatic changes or have not had to take the dramatic costs. that some of our competitors have had to. So a long-winded way of saying we're very proud of the profitability. Demand absolutely is still there, and we can take advantage of the challenging environment that some of our competition has found itself.

Did we answer your questions, Kenny? Yeah, absolutely. That's great. And then the second one on email strength.

Yeah, I think it's, you know, I mean, email's been around a long time, and it's a viable option for many use cases. In fact, it's a preferred option for many use cases. I think, you know... Our belief is that from a long-term perspective, this is going to be about what delivers the best customer experience rather than simply about cost. And in many cases, text messaging is a superior alternative in the sense that it has a higher read rate. It's more immediate.

also to deploy certain use cases like customer care, we believe conversation messaging is a more effective alternative, which is the belief underlying our long-term decision-making product.

So, you know, short-term levers, you know, in terms of cost, but I think the long-term is more about, you know, kind of how you enable customer experience in the most way.

Yeah. I see. That makes sense. Thanks.

Thank you. Our next question comes from the line of James Remy from Bank of America. Please go ahead. James, your line is unmuted. You can please proceed with your question.

Sorry about that. Thanks very much for taking my question. Thomas, a quick question for you. I think earlier in the call, did you mention that most of the conversations that you'd had with your enterprise customers about pricing pressure happened in autumn?

And the question is, have you seen, can you give any color on what those conversations have been like this year? And then relatedly, a quick question. In FY22, I believe your revenue, 21% of your revenue was from your top 10 customers. If I look back to FY21 on a performance basis, any indication of the trend for those top 10 customers? Thank you very much. Thank you, James. I think what we were trying to detect was as the world turned during 2022 and many businesses started to reassess that they're operating the way they're working and started to address costs. and the use of communication is one of many costs which businesses have been reviewing. We started to take notice of this, especially in our messaging business and our voice business during the autumn, and that's what we called out in previous earnings calls. It takes a while for that type of dialogue to turn into something concrete, we think this has played out as we expected and it hasn't necessarily worsened. But with a caveat that we never know what the future holds and how macroeconomics will develop, we do think that it's played out as we expected. It impacts our numbers, but we're not building backlogs, if that makes sense. That was answering your first question.

Customer concentration, I think the short one to that, James, is that, you know, customer concentration has been declining. So the top 10 share of our tools that we use continues to decline. Perfect. Very helpful. Thanks very much, guys.

Thank you. Our next question comes from the line of Laura Metier from Morgan Stanley. Please go ahead.

Good afternoon, everyone, and thank you for the introduction, Marina. I have two questions, please. The first one is, could you clarify if the headwind from the discount to a large customer in messaging will be fully in the base in Q2? What I'm trying to understand is whether that happened at the beginning of the quarter, in the middle, or towards the end of the quarter. And if it's pulling the base, is it fair to assume that we should see positive organic growth for the rest of 2023 now that it is behind you? And then the second question is on the messaging-adjusted visa margin. Could you please give more color as to why it's down sequentially versus Q3 and Q4 last year? And how should we expect it to trend going forward, please? Thank you.

So I think on the first question, the price impact is from the 1st of April 2022, Laura.

So, you know, it's filling the base of the Q1. There is also a volume decline from this customer, so that's happened gradually during the year.

Again, as we commented on it in the messaging segment in general, there is a volume decline, so that's obviously not the case, but the price impact is.

I think We speak specifically to the fact that assuming this customer impact that in Q1 we would have had within messaging plus 3% organic cost of growth, we're not guiding for the coming quarters. And then your second question, Laura, if you... It was around the adjusted EBITDA. It was just around, yeah, and I think that goes back to the scalability, both upwards and downwards in our rescue business, and we do have a seasonal impact where H2, you know, historically, and especially H2-4, tends to be stronger, you know, commercially active businesses, for enterprises, and then we do tend to probably see a weakening in Q1.

Also, it's got to do with the number of working days.

I mean, you know, in Q1, we do have short months in February and fewer working days as well. So I think that kind of plays into the margin.

The final thing I would add, if I may, Laura, is that Again, we noted that there were close to 40 new customers in messaging in Q1. We haven't seen the revenue impact of that. That takes a little bit of time to ramp, so that new revenue will show itself up in subsequent quarters.

That's really helpful. Thank you both.

Thank you. Our last question comes from the line of Amit Morwana from Goldman Sachs. Please go ahead. Thank you very much. Hi, Lorinda. Hey, Roshan, Thomas. I have two. First of all, Lorinda, as you look at the business, you talk a lot about efficiency, about kind of operating more efficiently but also growing. So I'm just curious to understand, do you feel that it is just better integration and extracting perhaps more efficiency and savings or do you see the scope for the business to potentially shrink in size and drive more kind of focus to drive, to deliver on that? Because obviously you've just gone through a lot of M&A prior to the last 12 months. The second one for Roshan, I mean, obviously cash conversion was very strong last year. It's come down in Q1. Can you give us a sense of how long perhaps some of the payable effect or reversal will continue? And should we think of when you expect to kind of hit the run rate or the 40% normalized run rate? Is it something likely to be sort of in the second half of the year, or is it more likely to be a 2024 event? Thank you. Hi, Mohamed.

Good to meet you, and thanks for the questions. I think the essence of your first question is, do I anticipate or foresee any divestitures? And the quick answer to that is no. The Cinch portfolio, I think, is very comprehensive and is poised to grow collectively, go forward. And in terms of operational efficiencies or operational excellence, you can find that in lots of different places within the organization, within any organization, quite frankly. You know, so as we think about business processes, as we think about the tools and the systems that we use to operate the business, as we think about the amount of, you know, people we have facing particular functions or particular customers even, all of that needs to be assessed, and there's plenty of opportunities to do that here. So that's what I'm talking about. I'm not talking about divestitures.

And let me take a second question there. I think, you know, as you rightly identified, we had a strong cash conversion last year. I think in the rolling 12 months, including Q1, we're at 60%.

What we have believed, of course, is that we should be in this business to generate a cash conversion of somewhere between 40% to 50% on a continuing basis. Now, when we talk about cash conversion, we include capex, interest, and tax, obviously. obviously, you know, within an increasing interest environment, you know, we do have a negative impact from that. Q1 also tends to be a quarter where we have, you know, slightly higher, seasonally higher tax payments, you know, as we close out 2022. And then finally, as you said, as you identified, we do have, you know, decreased account tables that I also included in my remarks. On the other hand, DSO continues to trend strongly. Now, working capital can be a bit lumpy from quarter to quarter, but I believe that we will continue to generate strong cash for the rest of 2020, and we will continue to deleverage. And this will go up a little bit in the longer term, up and down a little bit in the longer term from quarter to quarter, but we're convinced that 40% plus cash conversion is very much on the table for change.

Sorry, it did 40% on the table for 2023?

More than that, yes. More than 40% is on the table for 2023. Okay. Thank you. Thank you.