Sinch AB (publ)

welcome to the cinch q2 report for 2024. for the first part of the conference call the participants will be in listen only mode during the questions and answers session participants are able to ask questions by dialing pound five on their telephone keypad now i will hand the conference over to the speakers please go ahead

Thank you, operator, and welcome everyone to this Q2 earnings call with Cinch AB. My name is Thomas Heath, Chief Strategy Officer, and with me today I have our CEO, Lorinda Pang, and our CFO, Roshan Saldana. And with these opening remarks, I want to hand the word over to Lorinda.

Thank you, Thomas. Let's turn briefly to slide two, please. Cinch is pioneering the way the world communicates. Our customer communications cloud enables businesses throughout the world to reach and interact with their customers through all channels, including messaging, voice, calling, and email. We're built for scale and handle more than 800 billion unique customer interactions per year for more than 150,000 business customers. We are a global leader in our industry, and over the last 12 months, we generated 28.6 billion krona in net sales, 9.7 billion krona in gross profit, and 3.6 billion krona in adjusted EBITDA. Slide three, please. We'll cover some of the financial highlights in the second quarter. Cash generation reached an all-time high level as we generated more than 1 billion krona of operating cash flow in Q2 alone. This high level of cash flow is healthy even if we deduct around 240 million krona of payments that were received from some of our larger customers earlier than due. Looking at the last 12 months, the business has generated 3.2 billion in operating cash flow. Cash conversion from adjusted EBITDA, which again we measure on a rolling 12-month basis, is now at 72%. We're very proud of this performance, which well exceeds the 40% to 50% target range. Our strong cash generation also benefits our balance sheet and reduces our leverage. We repaid 881 million krona of debt in Q2 and a full 3.1 million krona over the last 12 months. Our net debt to adjusted EBITDA ratio is now 1.7 times compared to 2.4 times one year ago. Turning to our operational performance, I would characterize our overall performance as stable. Our gross margin continues to increase as our higher margin products grow faster and improve the overall mix. Our EBITDA margin is stable at 11% despite inflationary headwinds which affect our cost base. We recorded a slight organic revenue decline in the quarter with gross profit growing 2% on an organic basis. This low single-digit level is lower than we aspire to deliver on a longer-term basis. but it is the rate of growth we expect to see until our growth acceleration plan delivers results where customers, again, start to increase their investments in customer experience and digital communications. Our growth acceleration plan includes several initiatives across go-to-market transformation, product integration, and operational excellence. It is a transformation program for increased focus, higher commercial velocity, and improved efficiencies. Since the costs associated with driving this change are incurred earlier than the anticipated benefits, the timing of which is aligned with our plans, we are now offsetting with efficiencies that allow us to protect our overall profitability whilst executing on our transformation agenda. Unfortunately, these measures have meant that a number of colleagues were made redundant during the quarter. We have been able to execute faster than originally envisaged and realized gross savings of 58 million krona in Q2. This corresponds to 232 million krona on a full-year basis, and we are confident that we will reach the target 300 million run rate in the second half of the year. Executing on these cost reductions allows us to reallocate our spend towards growth initiatives and to offset inflationary pressures so that our overall profitability remains healthy. We have netted a 5% reduction in full-time equivalent headcount over the last 12 months. Behind these numbers are further movements as we are reducing even more headcount, but adding resources back in areas where we see greater growth opportunities. Let's pause briefly on slide four for an overview of our business mix. We changed from a business unit structure to a more integrated organization on the 1st of January, 2024. As required under IFRS, we updated our reporting to reflect this change in governance starting from the first quarter this year. The three regions, Americas, EMEA, and APAC, now form our operating segments, with Americas contributing more than 60% of total gross profit. We also introduced new product categories and now refer to our API platform, applications, and network connectivity. To add visibility into our cost base, we also now disclose adjusted objects by function, where R&D is the largest category. Let's now move on to slide five to look at performance by segment. In the Americas, we are reporting stable gross profit on a year-over-year basis in constant currencies. Lower campaign activities compared to the comparison period in 2023 caused growth in applications to slow. The year-on-year growth rate slowed also for the API platform, but we have reduced the rate of decline in network connectivity. During the quarter, we were again recognized as a global leader in Gartner's updated magic quadrant for CPaaS. EMEA recorded a 4% decline in gross profit on an organic basis compared to Q2 2023. This is an unsatisfactory growth rate, but an improvement compared to Q1 that's due mainly to the API platform. Our commercial focus in EMEA is now focused on RCS and the cross-selling of messaging and email. I also want to highlight the strong development of our network connectivity offering in EMEA. The product mix here is focused on software for mobile operators rather than voice interconnection services, and I'm very pleased with our performance here. Turning to AsiaPac, lastly, which recorded a very strong quarter, net sales were up 7% organically and gross profit growth was at 19%. We continue to see healthy growth in India and successfully leveraged partnerships to win new customers across the APAC region. You will recall we have referenced our integration with the Adobe ecosystem in the past, and our collaboration with TPG, the Australian telecom operator, is also developing well. Slide six looks at the financial development by product category. Whereas we see our API platform and applications offerings as our future-oriented growth drivers, the network connectivity products are managed more for profitability. Organic growth in gross profit was 5% year-over-year for both our API platform and applications this quarter. This is a lower growth rate than in Q1, and for applications and applications It has to do with some larger marketing campaigns by specific customers which contributed to last year's Q2 but did not make a corresponding contribution in 2024. For the ATI platform, we continue to see a slow market for SMS, which is a large contributor to gross profit in that category. Offsetting some of these pressures is a positive development in network connectivity, where the rate of decline has been significantly reduced for our Americans-based voice interconnection products, and the EMEA-based software business is performing really well. Roshan will add some further details to this development in a minute when he reviews the financials. Next slide, please. We recently published primary research where we interviewed hundreds of consumers and businesses in the U.S. to hear their view of what it takes to build meaningful and long-lasting customer relationships. You're familiar with the adage, you never get a second chance to make a first impression. First impressions last, and more than three in four consumers say one bad experience can end their relationship with a brand. Effective communications is a key component of a positive customer experience. For more than 54% of the consumers we surveyed, convenience is what makes the biggest impact. 20% of the consumers want to work with a company who is easy to work with. 11% say the company should provide more useful information. 13% expect a quick start or delivery. Trust also appears to be a key factor in making a positive first impression, with 30% of our respondents citing reputation as the main focus. A brand's reputation and their ability to build trust is a constant quest. Which brings us to slide eight for an update on RCS and the new features that Apple are adding to their next version of iOS. Shown on this slide is a screenshot from the public beta version of iOS 18, which Apple released a few weeks back. It will be made generally available this autumn and add a range of new features to existing and new iPhones. As you can see, Apple is adding support for RCS messaging, and importantly, for RCS business messaging. Since this is a carrier service, it will be made available for users when supported and switched on by each mobile operator. Already now, this service is enabled for iOS beta users by Verizon, AT&T, and T-Mobile in the U.S., and by a range of mobile operators across Europe. As we've mentioned before, Google made RCS enabled by default on the new Android phones back in August 2023. This means that the share of RCS-capable mobile handsets is now rising steadily, which is a development that will accelerate further when iOS 18 is made generally available. RCS will greatly improve the messaging experience when iPhone and Android users are texting each other. For businesses, there are even more benefits, which are showcased again here on slide 9. The ability to send messages from a branded and verified sender is a clear improvement compared to SMS. Businesses can send images and video in high resolution and benefit from improved analytics as RCS messaging supports read receipts. A brand can also include clear calls to action with pre-populated action buttons to trigger phone calls, open websites, or maps app on the phone. Add to this the rapid development of generative AI, which enables brands to engage in personalized one-to-one interactions with every unique customer. We have invested in technology for conversational messaging over several years, and we're excited about these prospects. However, it's important to recognize that RCS adds tangible value also to a more straightforward use case like text notifications. On slide 10, we share one such customer story. Easy Park Group is a global leader in digital parking, serving millions of users in over 20 countries. Before partnering with Cinch, Easy Park faced significant challenges in delivering SMS parking reminders and one-time passcodes across diverse markets. Managing multiple vendors led to inconsistent delivery rates and a lot of time spent troubleshooting, which negatively impacted the user experience. To streamline operations and enhance service quality, EasyCart consolidated their messaging infrastructure with Cinch. This move allowed them to maintain high delivery rates and simplify their processes, which greatly improved efficiency. RCS has offered opportunities to build on this partnership. Sending messages as RCS instead of SMS allows EasyPark to enhance security with verified senders, boosting user trust and engagement even further. Today, 40% of EasyPark's messaging is in Germany or sent via RCS, achieving an impressive delivery rate of 97.4%. This success has encouraged EasyPark to plan the expansion of RCS to more markets. They're also exploring other opportunities with RCS, such as enabling users to chat with support or extend their parking time without opening the app. This case shows how Sentient's messaging solutions, and in particular RCS, can transform user experience and operational efficiency. Our reliability and scalable technology not only meets but exceeds the evolving needs of our clients. It's partnerships like these, that drive our success and solidify our leadership in the CPAS market. With these remarks, I want to hand the word over to Roshan.

Thank you, Lorenza, and a very good afternoon to all on the call.

Let me start reviewing our financial development for the quarter by moving to page 12. Net sales for the second quarter were marginally up year on year and with a slight currency tailwind. This meant that the organic net sales growth was a decline of 1%. Out of the regions, Americas came in flat year-on-year. APEC grew 7%, and EMEA was down 8%. Reduced revenues from the 8YY toll-free reform affected the network connectivity product category in the Americas region by 42 million kroner. Within network connectivity, sales to operators of voice products have seen continued decline in volume as observed during the first quarter. Turn to page 13, please. Gross profit increased 3% on a reported basis to 2.4 billion Swedish kronor. Organic growth in gross profit was at 2%. Growth in the Americas region came in unchanged versus 2.2 last year. EMEA was down 4%, whereas APAC grew at a strong 19%. If we start with the strong GDP growth in APAC, it is driven by net sales organic growth of 7% and a weaker than usual comparison quarter. In EMEA, as we said in Q1, messaging development is hampered by us exiting certain fixed price contracts that we had last year. This is something we expect will diminish towards the end of the year. In Americas, API platform and applications continue to contribute positively to growth, while network connectivity had a negative impact on growth. This decline is driven by reduced voice traffic, an 8YY impact of 38 million kroner on gross profit, and increased network costs, as we said last quarter. The effect of increased network costs remains in this quarter, but is slightly lower. Let's do a deep dive. Next page, 14, please. One of our main product categories in network connectivity is network connectivity, which accounts for 21% of gross profit globally. Specifically, network connectivity in America accounted for 18% of gross profit for the group and consisted largely of products within the U.S. voice business targeting telecom operators. In Q1, we informed you that the reason for the 18% decline in year-on-year gross profit that you see in this graph was related to the 8YY reform impact, increased network costs for voice connectivity services in the U.S., as well as reduced demand from operators. We have stemmed this decline in the quarter to minus 12% due to good progress in our negotiations with those operators. Above all, we have reduced the risk for large increases of costs going forward. We are also reducing reliance on legacy connectivity through service virtualization. and will use pricing as a tool to manage profitability, which is the key focus for this product area. We still have the year-on-year effect of the AYY reform on network connectivity in the Americas, causing a decline of 38 million kroner in the quarter compared to prior year. The reductions contemplated by the reform were completed as of 1st August 2023, but caused year-on-year headwinds until 12 months later. All in all, we expect gross profit from network connectivity in the Americas for the second half of 2024 to be roughly the same as for the first half year. This means we will expect a year-on-year gross profit decline also in Q3 and Q4. Turning to page 15, this slide shows gross and EVTA margin development for the business. Gross margin increased by 80 basis points over last year and remained stable compared to previous quarter. This change is driven by favorable shift in revenue mix as the applications product category, which has higher gross margins, sees strong enterprise demand in all regions. EBITDA margin is up 1% year-on-year, driven by currency movements and lower cost for share-based incentive programs. compared to previous quarter if the margin is flat. Operating expenses excluding adjustment items are flat over the previous quarter as sustained investment into our transformation programs continues through the quarter. These investments together with inflation offset realized savings during the period. Personnel costs continue to be our largest costs accounting for over 70% of our operating expenses. Historically, the impact from annual merit increases has been spread out during the calendar year, but with a concentration in the second quarter. In the new operating model, we have now aligned the merit cycles with the consequence that the increase will be in the third quarter of 2024. Adjusted EBITDA for the quarter came in at 867 million kroner, which is coincidentally almost exactly the amount from a year ago. Let's move on to page 16. where we show the continued strong free cash flow generation after investments. In the quarter, we generated 903 million kroner and 2.6 billion on a rolling 12-month basis. Our cash conversion has helped by unlocking working capital to the tune of 851 million kroner during the rolling 12-month period ending at Q2. Cash flow for the quarter was also helped by payments of 240 million kroner that were received from a few large customers earlier than this. In the graph to the right, we show cash conversion from adjusted with DA on a rolling 12-month basis, which in the quarter was at 72%. While we still believe that our target range is 40% to 50%, we are delivering above that range due to optimization of working capital. Our business continues to operate in a very asset-light fashion with total working capital at negative 470 million kroner at quarter end. We paid 130 million in interest during the quarter equating to an effective interest rate close to 6.5% including fees. Interest paid during the quarter was flat compared to the first quarter due to the successful continuous deleveraging despite increasing effective interest rates. Please move on to page 17. Here we see the financial leverage ratio for Finch, which is net debt over adjusted EBITDA. We are glad to report a continued deleveraging as expected with leverage now down at 1.7 turns compared to 2.4 turns a year ago and two turns at the end of the first quarter. The KPI is measured excluding the impact of IFRS 16-related lease debt on both net debt and adjusted EBITDA. Deleveraging continues to remain a focus area for CINCH. and we expect this ratio to continue to decline through underlying cash flow generation cooperations and increase in adjusted VBA. During the quarter, we used the cash generated from the business to repay 881 million kroner of debt, bringing the total repayment over the last 12 months to 3.1 billion kroner. It's especially heartening to see that since the second quarter of 2022, we have now paid down debt by close to 4 billion kroner. Please turn to page 18, where we give details on our debt portfolio. We have cash and cash equivalents of 734 million kroner at quarter end, in addition to the unutilized credit facilities of 5 billion kroner. As you see on this page, our available cash and committed credit facilities more than exceed maturities during 24 and 25 of 3.5 billion kroner, even before considering any further cash flow generation from the business. On page 19, We are reiterating our financial targets. Adjusted VDA per share measured on a rolling 12-month basis grew 1% at the end of the quarter, compared to a target to grow 20% per year. Our change in operating model and growth plan is intended to help to accelerate growth and thereby achieve margin expansion. Lorinda will shortly provide an update on progress in this area. Net bet over adjusted VDA at 1.7 turns Excluding the fact that our 16 related leases is well below our threshold of three and a half turns, and we expect to continue to deleverage. With those words, I would like to hand back to Lorinda to take us through the growth acceleration plan for SINGH.

Thanks, Roshan. Let's turn briefly to slide 21, please. As you will recall, we started this year in a new organizational structure, and we have brought together our customer-facing teams into a new regional structure where sellers are tasked to sell our full product portfolio. We have created global functions for product and technology, as well as for our support functions, and have launched a growth acceleration plan to increase our growth rate. Next slide, please. Slide 22 illustrates the phasing of investments and their returns as we execute this plan. We've revised this visualization slightly as we were able to realize initial savings ahead of plan. With the progress made in Q2, we are certain to reach the targeted 300 million gross savings run rate before the end of the year. We also expect our work around go-to-market transformation to yield results in the coming year. We are starting to see traction in cross-selling with new customer wins leveraging multiple products and positive pipeline development for cross-selling to the base, key leading indicators that give us confidence that we are moving in the right direction. Slide 23 documents some of the more practical progress made during the quarter. Within the scope of our go-to-market transformation, we have built customer visibility dashboards and set up a joint account planning framework. Joint account planning is a key part in the integration of our sales teams. Improving the visibility into how customers use our different products is a key enabler that allows our salespeople to drive and track cross-selling. We've also made progress in our product integration, where we have launched a single Cinch ID for our API platform products. This allows our thousands of customers to transition more seamlessly between products without signing up again as a new user, and is a step towards increased cross-sales in our product-led growth motions. During the quarter, we have also deployed our message media products within the EU, or in Germany more specifically, which will allow us to broaden the geographic reach of that offering. Within operational excellence, lastly, we have made good progress in the alignment of global customer operations. As we've touched on earlier, we've also made good progress in reducing our costs, which is work that will continue over the coming quarters. Please turn to slide 24, where we ask you to save the date for our upcoming Capital Markets Day on the 20th of November. We look forward to spending more time with you to discuss our market offering and strategy for continued value creation. Before we take questions, I want to take this opportunity to offer some closing remarks. In the second quarter, we delivered record cash flow and solid profitability. Operating cash flow exceeded 1 billion krona in the quarter and totaled 3.2 billion krona over the last 12 months. We continued to pay down debt, And this quarter, we paid down 881 million kroner alone. And our net debt is now at 1.7 times EBITDA, down from 2.4 times one year ago. Growth rates remain lower than our longer-term aspirations. And to address this, we continue to execute on our growth acceleration plan. An important part of that plan is to identify savings and efficiencies so that we can invest in growth initiatives without impacting profitability. This quarter, we realized a large part of our targeted 300 million krona saving targets, with as gross savings of 58 million corresponding to 233 million krona on a full year basis. Lastly, we saw Apple enable support for RCS messaging in the latest beta version of iOS, which makes us more optimistic about the long-term trajectory of our messaging businesses. We are the market leader in several key RCS markets already today, and during the quarter, partner reaffirmed our status as a global leader in their magic quadrant for CPaaS.

With those closing remarks, we're happy to take your questions now.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial £6 on your telephone keypad. Please notice that only two questions are allowed per person. The next question comes from Akhil Duttani from JP Morgan. Please go ahead.

Hi, good afternoon. Thanks for taking the questions. I've got two, please. First, Lorinda, you mentioned in the press release that you're expecting growth over the coming course to stay in the low single-digit range in the near term. I just wondered if you could comment on any puts and takes as we look at Q3 and Q4. And in the release, you talk about the reason for this lower growth and we're expecting midterm to be a function of customers not yet re-accelerating investment. So I guess I wanted to understand, you know, what are you seeing there and how much is down to that versus maybe execution. So that's the first piece. And then the second one is on the longer term. You've obviously given us a date for the capital markets day, which is obviously very welcome. I'm sure you're not going to want to give away too much just yet, but maybe high level if you could comment on as you're now running into that event. what we might want to think about in terms of key focus areas. Thanks a lot.

Sure. Thank you, Akhil, for the questions. So with regards to the near-term growth in Q3 and Q4, I think, to your point, there are definitely puts and takes. We certainly have some tailwinds with regards to AYY reform starting to diminish the impact on a year-over-year basis. And having said that, we had, you know, some fairly strong comps in Q3 and Q4 of last year. You know, so, again, there are puts and takes. My comments about customers returning to increasing their spend with regards to customer experience, that's just a normal market trend, in my opinion. The market is somewhat slow right now, and we don't expect that to dramatically change in the near term. So it's really not about things changing, and it's certainly not about our execution. In my comments, in my prepared comments today, you heard me talk about the leading indicators or the early indicators. Obviously, we can't translate that to big growth numbers at this point because they are exactly that. They're leading indicators, but they're important for us to watch carefully. So as we bring these sales teams together, the expectation is a salesperson who is single-threaded to a particular product now has the ability to sell multiple products. So watching cross-sell activity, from a pipeline creation standpoint is incredibly important, and we are seeing those trends. So as you think about the CMD, our longer-term focus is absolutely about execution against the entirety of the growth acceleration plan, which is a combination of the go-to-market transformation, but importantly, product integration and continuing to improve from an operational export standpoint. which has everything to do with a lot of the back office, systems process, and being able to deliver on the business in a more simplified and efficient way. But our focus absolutely will be on returning this business to growth.

Great. Thanks so much.

Thank you.

The next question comes from Eric Lindholm-Rogessel from SEB. Please go ahead.

Yes. Hi, everyone, and thank you for taking my questions here. I wanted to start on APAC accelerated very nicely here in the quarter. This looks to be driven by sort of very high growth in the API platform. Is there any sort of key drivers here, and do you expect this to – continue in the coming quarters as well. And then a second question. I mean, working capital had some temporary effects in it. Very strong there, of course. But I mean, how should we think about working capital for the full year here? Should it reverse fully or just part from this level? Thank you.

Thanks, Eric. I'll start with a portion of the APAC answer, and then I'll hand it over to Rosham. You know, to your point, it was a very strong quarter for APAC with gross profit expanding by 19%. on a year-over-year basis, so we're extremely pleased with them. We noted in the CEO word of the report that we saw continued strength from India very specifically, but we also saw continued or good strength from our message media businesses as well.

Yeah, I mean, just – hi, Eric, this is Roshan. Just building on that answer, as I said in my comments, on the gross profit performance, you know, I think you should look at this performance as being definitely on a high level for APAC and realistically looking forward, you know, revenue growth was at 7%. We should definitely do better than that, but not maybe as high as gross profit was due to a weak comparison quarter in Q2. So if I take your second question on working capital, yeah, I mean, working capital is, as I said before, right, we have both large customers and non-suppliers, so it can be a bit volatile as we receive or pay close to the quarter. And in this case, you know, a bit of a positive surprise, but even without that, excluding that, it's really good development. And, you know, in general, the business is very asset-light. I mean, there's no reason for us to believe excluding then this one-off effect that we've had in the second quarter that working capital deteriorates significantly over a period of time.

All right. Perfect. And have a nice summer. Thank you. Thank you.

The next question comes from Daniel Thorson from ABG Sundal Collier. Please go ahead.

Yes, thank you very much. Two questions from me as well. First one, I'm a little bit curious about terms of growth rate per customer groups. Do you see any meaningful differences between large enterprises and SMBs across the regions? And then secondly, in terms of headcount decreases, are you more active in any region like Europe with negative growth rate, or can you reduce overhead headcount so that you can still turn the business around to growth again when the market turns?

Okay. Thank you, Daniel.

Sorry about that. So I'll take the headcount question first, and then we'll come back to the customer growth. I think your question was around is there a difference between customer groups from a graduate standpoint. So, thank you for clarifying. So, on the headcount side, I mentioned in my comments the fact that while you see a 5% net reduction year over year, there's a lot of movement underneath of that, right? So, we are being more aggressive in certain areas, and we're investing in other areas. So this is very much about allocating our resources more appropriately to the areas where we see good opportunity for achieving the transformation plans or to accelerate growth. So specifically, India would be a great example where we are growing headcount. It's obviously a high-price market for us already, and so we want to continue to invest in that market. But like I mentioned, underneath of that net five, there's a lot of puts and takes and movement and allocation and decisions that we're making. On the customer segment piece from a growth standpoint, there are no real changes. as far as we know, the SMB or the mid-markets are still growing faster than enterprise in general. Roshan, do you want to share some thoughts?

Yeah, I'll just add a little bit to that, what Lorena said. I think I will, you know, just going back to the commentary on Hedinia, where we referred to, for example, the fixed price contracts. I mean, that is, for example, an impact mostly on large So we do see, as we've said before, more of an impact on our large customer segments who have been more cost-conscious in theory and less so in the SMB segment, which is heavier in our applications product category or heavy users of our application category.

So, yeah.

Yeah, that's very helpful. Thank you very much.

The next question comes from Thomas Nilsson from Nordea. Please go ahead.

Well, hello. My first question is whether you see any early positive signs from your cross-selling efforts and experiences you could share from that would be very helpful. And my second question would be what would be a reasonable tax rate to expect for 2025? and what adjustments should be made to pre-tax profits to arrive at a realistic estimate for tax next year?

Thank you. Okay. Thank you, Thomas. As far as cross-selling, to your point, you know, we are looking at early signs and, you know, it comes in the form of behavior shifts, conversations that the account teams are having with one another. how they're making progress against the account planning frameworks that we've put forward. But on a measured basis, we're looking at how the pipeline is starting to change. And we are, as I mentioned, we are starting to see some good indication that cross-sell pipeline is growing year over year. And it differs in each of the markets. But at the end of the day, at the highest of levels, we are seeing some good leading indicators from a pipeline creation standpoint. That's both in terms of cross-selling as well as pipeline creation for customers that we are considering priority accounts within the base. These are customers where we believe that there is good growth potential. There's good white space. And what I mean by that is opportunities to sell a multitude of products into that particular customer. And that could be because they are in a particular industry. because they're with a particular competitor. We've done a lot of analysis on the base to understand who the priority accounts are and the fact that we should put additional focus there. Roshan, you want to take the technical test for the question?

I thought you might pass that one to me. I think on the tax, I think just taking your two sub-questions, Thomas, on the profit before tax, the one thing that you should definitely adjust for is the amortization of acquisition-related assets. As you know, we have quite significant acquisition values on our balance sheet that we most of which are amortized with the exception of goodwill over predefined periods of time. Those amortizations are not tax deductible to the largest extent in the countries in which we operate. The tax rate is a bit tricky because, of course, it depends on, you know, where we make profits in the world. So, but I think a historical average of effective max rate has been in the 27 to 28% range, and we don't see why that should change significantly in the short term.

Okay. Thank you very much. Thanks, Thomas.

The next question comes from Pridrak Savinovich from Carnegie. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Lorinda, you specifically called out R&D as your largest cost item in OPEX. If you could discuss some more on how you allocate this R&D, and are you happy with the position of your product portfolio right now? Are there any products that you feel you're lacking to be able to reach your target of returning this business to growth?

Thanks, Prajak.

Sorry, I was just wondering, Jan, your question. So as far as RD is concerned, it is the largest group. This does include both engineering as well as operations, and we do have operations around the globe, both in terms of technical operations and customer operations. So that's hopefully answering your question in terms of what's within it. And as we look at continuing to bring these organizations together, we'll continue to get better at serving our customers, but we'll also look for opportunities to have efficiencies there as well. As far as the product portfolio is concerned, I think we've often said that we have an amazing product portfolio, and it's It's well-rounded to serve the needs of customers looking to improve the experience they deliver to their customers at the end of the day. So I think at the highest of levels, the portfolio is well-defined. It's well-suited to help us achieve the growth expectations that we have. the opportunity for us is to pull those products together so that our customers have an experience that is much more seamless and unified than it is today. And, you know, we have over 150,000 customers today in our base. That's a pot of gold, quite frankly, because most of those customers, the vast majority of them, still only purchase one product from us. So our ability to make the user experience much more easy and friendly for them to procure and use for services across the platform is where the opportunity is. So it's not necessarily adding product, although, of course, you know, never say never. But it's not necessarily about that. It's about bringing them together.

Okay, makes sense. And then finally, base. on the market conditions, are you happy with organic growth performance in this quarter? And would you say that this is representative of what can be seen in the coming quarters?

I think we are, you know, it's certainly a slower market. And I would say, in spite of that, we grew 2% organically. However, it does not meet our longer expectations of ourselves and our aspirations, ultimately. And as far as the coming quarters are concerned, what I've said is that I expect it to be roughly about the same rate.

Okay, super. Thank you. Thanks so much.

The next question comes from Frederick Littell from Handels Banken. Please go ahead.

Hello there. Thank you for taking my questions as well. Hope you are all well. I would like to have one on what you talked about in Q1, where you referred to that you had closed a few contracts in EMEA. Would be interesting to hear if that has been followed by other sort of rescoping or other of volume contracts that has not worked, or if that was a one-time situation you had in Q1. And the second question would like to talk a little bit about network connectivity. We talk a lot about A by Y. I would like to understand a little bit more about the dynamics underneath in the market, especially in the U.S., and what you see there, what customers do, what your competitors do, and all that stuff. So it would be interesting to get a bit more in-depth on that. Thank you.

Sure. I'm going to ask Roshan to take the fixed-price contracting question, Q1 to Q2, and then I'll come back and talk about network connectivity in the U.S.

Yeah. Yeah, thanks, Roshan. So, yes, I mean, as you noted, we had some fixed-price contracts that we exited mainly due to them not meeting our, those contracts not meeting our margin threshold expectations when they came up for renewal, and, you know, Obviously, that impact has stayed with us in year two, but there are no additional such contracts, and we don't expect there to be any larger material such impact in the short term. Again, we will continue to evaluate, of course, these contracts as they come up for renewal, but we don't have any reason to wait.

Could be more.

Okay. Very clear. Thank you.

And then, thank you for that, Rishon. And then, Frederick, with regards to network connectivity in the U.S., to your point, there is definitely a lot of dynamics underneath of that big category of network connectivity. So, certainly, you called out the 8YY reform, that reduction or that year-over-year change will be eliminated effectively by Q4. So, we'll start to see some improvement in Q3 because part of the quarter, you know, returns to a comparable period year over year, but Q4, you'll see the full benefit of that. I would say in the U.S., as it relates to this part of the business, I want to remind you, this is voice connectivity, right? This is for voice services, predominantly sold to other carriers in the U.S., and this infrastructure is fairly legacy as it relates to what we procure from carriers. So this is very much a buy-sell set of relationships that we have in the U.S. And the services that we purchase is on fairly legacy connectivity. And so we have the opportunity to continue to evolve that connectivity and leverage other technologies. Specifically, you know, you hear us talk about virtualization and, you know, it's really an opportunity for us to convert from a legacy infrastructure of TDM to IP, which will both improve the experience but also start to stabilize the cost structure there. You heard Russian talk about the fact that we've made some progress with regards to the carrier relationships on the procurement side, so on our buy side. We have strong relationships with all of the carriers in the U.S., and I think, you know, we make good progress there to make sure that we are managing our costs on a go-forward basis over the long term.

Anything on compliance? the competitive landscape and of your peers there, what they are doing, moving, leaving or whatever, anything?

As it relates to network connectivity?

Yes, in the US.

Nothing unusual, I would say. I think we're all dealing with the same challenges and that is, You know, voice services continues to be an incredibly important application. People still use the telephone for as much as that might be a surprise. The voice services are still used and will continue to be used. And all of the carriers are looking to make sure that they do that in the best way possible. For us, that means we manage this business for cash.

All right. That's perfect. Thank you very much.

Thank you.

The next question comes from Deepshika Ugawal from Goldman Sachs. Please go ahead.

Hi. Thanks for taking my question. So I have two. So first one is you called out India as a high growth market and you see a lot of opportunity there. And recently we saw an announcement from WhatsApp in terms of how they're thinking about making it more utility based and promoting it, like, to be more a utility-based application rather than just a marketing software and looking for, you know, more as a channel to, you know, do authentication using OTP. So what kind of opportunity, like, you see from there in the Indian market? So that will be my first question. And the second one, can you, like, in terms of cost when we look at it, there is this – you have the – the growth acceleration program where you are looking at optimizing cost. And then I think Roshan talked about how personal expenses will be more equalizing through the four quarters, although there will be an increase in the third quarter. So looking into all of that, how should we think about the cost development over the next few quarters?

Thank you, Deepshika. I'm going to ask Thomas to cover the India and WhatsApp announcements so that we can share our perspective on where the growth opportunities are, and then I'll ask Roshan to come back to the cost question.

Thank you, Lorinda. Yes, there are some changes in how Meta is pricing WhatsApp for businesses. This is not the first time. They've changed their pricing model and their pricing levels several times before, and they also vary by country. If we take a step back, WhatsApp is a phenomenal channel, very popular for end users and very worthwhile for businesses as well, especially in markets where WhatsApp usage is broad-based. India is certainly one of those countries, as is Brazil and several others. Ultimately, Pricing is one component, features is another. We think the optionality between WhatsApp and RCS, which is now coming fast, is really positive for consumers and also really positive for the ecosystem. So more optionality and then an improved position or sort of value chain is what we see from this.

Yeah, and thanks again for the question on the cost development. You know, again, we're not giving any specific guidance, but I was just trying to clarify a little bit the puts and takes. I mean, as we've said before, we do have a cost reduction program where we are aiming to achieve an annual drum rate of $300 million in cost savings by the end of the year. We've made good progress, and we're actually leading Q2. We already reached $230 million of those $300 million. So we're satisfied there. At the same time, we're investing in the transformation program, and those investments, of course, timing-wise, you know, are coming a little bit ahead of the cost savings that are being realized. I just specifically wanted to call out on the annual merit cycle for our largest cost, which is, you know, related to the depot, and our biggest asset as well, that In previous years, we had it spread out through the year as we've operated in different business units, et cetera. And now we have gone through one operating model across the company, and therefore, this will come in in the third quarter. So there's a timing change related to that cost increase. I was just calling out that specific item during my comments.

I hope that helps you get a better picture of the cost development.

Yeah. Yep. Thank you so much.

Thank you.

The next question comes from Laura Metier from Morgan Stanley. Please go ahead.

Hi. Two questions for me, please. The first one is a follow-up to the other question on the cross-selling. Can you tell us a bit more about how easy is it today for a customer to purchase different products from Finch? Is it a seamless experience or not yet? And then second question is on the market environment depending on products. Are you seeing different trends here, for example, for your email products? Are you still seeing strong growth or are you also seeing a challenging environment there? Thank you.

Hi, Laura. Thanks very much for the questions. As far as cross-selling, the user experience for a customer that might be self-servicing, it is not a seamless experience to cross over between all of the different self-serve opportunities or the different products. They can certainly go there individually and purchase and have a good experience on its own. traverse between products is not seamless yet. As I mentioned in my comments and earlier questions, I expect that through the product integration work, our aspiration is to provide a much better user experience for that sort of purchasing. Secondly, on the seller-based motion or the seller-led selling motion, I would say that We work our hardest to be able to put a unified front in front of our customers now. That really is the point of bringing the sales organizations together as of January 1st. So the sellers are starting to get equipped or enabled to be able to sell the full portfolio. They are now in a position where they can ask the right questions. They can probe for the right opportunities and understand the business challenges that customers are trying to solve. And while they still may not be necessarily experts in the entire portfolio, they can come back into the organization and find the experts who still exist within the organization to be able to demonstrate and pitch those products to our customers. So, long-winded way of saying, it's a bit mixed at this point, and it is certainly our intention to continue to improve this and make it simpler for both sellers as well as, of course, our customers to both purchase and use all of our products. As far as the market environment by product, I would say, and you're referring to the old segments that we shared And I think you called out very specifically email. Email continues to be a very strong product. It's one of the best in the marketplace. And we still see a big demand for email products. And interestingly, it's a very natural cross-sell opportunity for our messaging customers because anybody that's sending messages is definitely sending emails. And so we're leveraging our relationships, our existing relationships to pitch more email into those same customers.

Thank you. Thank you.

The next question comes from Victor Cheng from Bank of America. Please go ahead.

Hi, and thank you for taking my questions. A number of them have been answered already, but maybe going back to the point on headcount, obviously there's a net 5% reduction and there are a lot of movements underneath. You talk about increasing R&D, but when I look at the split, which is I think 49% rolling 12 months, which is the same as I think in financial year 2023, how Well, my question is, how should we think about headcount in terms of these functional areas? And just to be clear, are you still thinking of reducing more headcount in net terms or just shifting around, you know, across areas? And then second question is, relates to the RCS. Obviously, you've talked about it. You know, iOS coming in, I guess, I believe, you know, it's September, October period typically. how should we think about the ramp-up as it rolls out to iOS in terms of the discussions you might have with customers, any kind of intentions and willingness to shift more by Q4 this year? Thank you.

Thanks very much, Victor. I'll try and start on both of these for you and then ask for some support on RCS in particular with Thomas. But from a headcount perspective, I think it's important to understand that, you know, we are doing well with regards to the savings targets that we talked about for this year. When we brought the organization together in January, we said we would look to eliminate duplication and create some efficiency. I think what you've seen us do in Q2, and it will continue now for the next quarter, is we've really simplified or started to eliminate a lot of duplication that existed. Now, we're not at the efficiency point, and the reason being is that there's investments, and you've seen that with regards to the IT investments very specifically. There are investments that need to happen to consolidate a number of the back office platforms and systems that exist today. Until we do that, we need to continue to have people and roles here to support that because they're fundamental to our business. So there's a lot of foundational work and tech debt that we're looking to solve here. So when we put up this slide where we talk about what the costs are versus the benefits or where the efficiencies are versus the benefits, the timing you'll see is we look for this initial phasing of savings in 2024 we'll start to see benefits in 2025. But if you look at that chart, it also talks about additional efficiencies and savings in outer periods. So we do expect that through this process, we will not only return this business to an accelerated pace of gross profit growth, but ultimately we do expect to expand margins. As it relates to RCS, You know, you can tell we're very pleased with Apple's announcements, but this is a space that we have been investing in for many years. And so I think that Cinch is very well positioned to have a leading position as it relates to RCFs. We have relationships, very strong, trusted relationships with over 600 carriers across the globe. That is incredibly important because RCS is dependent on those carriers adopting that technology. And so the relationships we have with them will allow us to play a role in that. We also are looking to educate our customers, initially our existing messaging customers, with the power of RCS. And we've got, you know, our sales organizations around the globe already doing that. They have been doing that for quite a while. And so we are starting to see a good ramp up. And Thomas, you want to kind of give your perspective here?

Absolutely. No. And as you said, the next version of iOS, iOS 18, most most people expect that to come in september as you put that or september time frame uh as lorinda said we've invested for many many years and and can leverage our strong operator relationships um as we think about this unfolding you know your parts of your question was how quickly businesses will embrace this and you can think of a few different factors First one is handset support. And here we've talked about how iOS support, you know, rapidly improves that. The second one is carrier support. Since this is a carrier service, it needs to be switched on. Here, you know, that will take some time too, although we're seeing progress already now. Third one is pricing, which varies by carrier. Here, most operators are pricing basic RCS messaging more or less on par with SMS, maybe a slight premium. But, of course, that's an important aspect for businesses. And then, you know, fourth area, of course, is the use case. If you are a business and you're looking to send a one-way notification, similar to what you're doing today on SMS, then the transition can be quite smooth if you pick a strong vendor. If you're developing a more advanced use case, you're including pictures, video, interactivity, then there is more work on the enterprise side to enable that, right? To develop a conversational AI experience or conversational messaging experience is a little bit more like developing an app compared to just sending a notification, right? So our expectations is that the more straightforward use cases will lead. and then we'll have a long trajectory of adding more complex and value-enhancing use cases over time.

Got it. Thank you. Thank you, Victor.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thank you, operator. I just wanted to take the opportunity to thank everybody for joining us today and to wish everybody a very happy summer, particularly here in Sweden. We appreciate both your interest, your questions, and your support.