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.