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Good day, and welcome to the CLX Communications AB Interim Report January to September 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Thomas Heath, Head of Investor Relations. Please go ahead, sir.
Good morning, everyone, and welcome to CLX Communications' third quarter earnings call. My name is Thomas Heath, I'm Chief Strategy Officer and Head of Investor Relations. With me on the call today is our President and CEO, Oscar Werner; and our CFO, Odd Bolin. With that, I'll hand the call over to Oscar for an update on the quarter.
All right. Thank you. Welcome to CLX' earnings call. This is my first earnings call as the CEO of CLX, so I'm really looking forward to this journey. So the Q3 summary is group organic revenue grew 13% in local currency with a gross profit up 26% due to both organic growth and successful M&A. We do see that our M&A transactions done in the previous year and years are developing favorably. Adjusted EBITDA is up 33%. We see strong market growth in certain segments, and we see further growth opportunities both organically and through M&A. And our markets are developing to richer media and conversation messaging where we see a lot of different interesting opportunities. We will, therefore, revise our leverage policy to allow for 2.5x net debt-to-EBITDA to support our M&A strategy. And as you can understand, we do see interesting M&A opportunities. Organic investments in OpEx may impact our earnings in the coming year before new initiatives translate into to higher revenues and gross profit. So we see several opportunities in the market in high growth segments that we want to ensure to capture in order to drive growth in the future. If we look at the organic growth initiatives, we see both sales and new product offerings -- offering opportunities that will drive organic revenue and gross profit growth in a couple of different areas. The first one is internal automation and efficiency. These are relatively large opportunities to become more efficient by automation. We see product development around rich media and conversational messaging. This market is developing favorably in many, many different areas, which will drive market growth. And of course, as a market leader, we want to capture those increased growth opportunities. We see faster go to market for our personalized video messaging, this is from the Vehicle acquisition. We see a very strong pipeline with very solid customers there, and we want to capture the market opportunity. And we see sales and marketing initiatives to drive direct sales and channel partner business, both our direct sales to enterprise and sales pipeline is improving favorably that we see strong channel partners that we're using as go-to-market partners where we have strong opportunities for growth. If we look a little bit on the messaging business, we have Enterprise Division, gross profit up 26%; and the Enterprise Division EBITDA, up 33%. The A2P messaging volume up 6% in year-to-year in comparable volumes -- in comparable units. The difference there is partly M&A and partly that in this quarter, our gross profit per message improved more than the volume, if you will. In certain quarters, we have volume going up more than gross profit. In this quarter, we had gross profit going up [ and ] more volume, which I personally see as a very positive trend. You can see that trend in later slides. A little bit of a commentary on Slide #6 for messaging. We have increased messaging traffic to certain high-margin markets. We see our markets are different in characteristics. Some are high-margin percentages and some are lower margin percentages. And in this quarter, we had increased traffic to the high-margin markets. Typically, actually, average gross profit per transaction is relatively similar between the markets. But since the underlying cost structure in the markets are different, the percent margin in different markets may be different. We see that Unwire is continuing to perform well. We're happy to see that acquisition continuing to perform, and we see increased revenue in the Vehicle personalized video with cross-selling both to operators in Europe. So we're taking the same business model from the U.S. to European operators, and we see great interest there. And we're taking it to our other enterprise customers in the U.S. with a very, very strong interest and uptake. So I strongly believe that the Vehicle acquisition was a very good move. We are in active dialogue in delivering significant volumes to many of the U.S. global tech companies, and we see that momentum strongly going forward. And we see that we both can add more traffic from our existing customers, and we are winning new ones. These projects are long time to market. I mean, it's very, very large customers. It takes some time to go to market, but we see we have a good traction in both winning new ones and increasing our market shares with ones that we have. We are focusing our forward-looking investments on, like I said before, rich media, conversational messaging, RCS, OTT chat apps and personalized video. So as you can see, we're moving from a much richer messaging portfolio gradually, and we see a good market uptake from that and we see the market developing well. And we see that this will drive market growth in the years to come due to that the messaging channel becomes richer and more interesting for enterprises to use. If we then look at the real-time voice and video business that we have. So Sinch is continuing to build its -- build and invest in its real-time voice and customer adaptations. We see our ride-hailing business developing favorably with plans to launch number masking in further markets this year as we have a strong pipeline of good markets for the number masking voice product. And we also have a strong pipeline for the verification business with customers in multiple industries. We also do see improved cross-selling where voice and video is marketed alongside messaging. So we see the kind of the cross-selling between the different teams that we have during the quarter, integrated the teams more thoroughly with great effect also in customer engagements. Truly, this becomes a -- I mean, you want -- as a customer, you want to both engage with us and voice in real-time voice and video -- oh, I'm sorry, in messaging and real-time voice and video. So that's a natural, but very good development to see.If we then switch to Slide 8, our Operator Division. The underlying business is developing as planned. We have continued improvement in EBITDA compared to Q1 and Q2 this year. We should note that the earnings in the '17 Q3 is an unusually high quarter and due to certain capacity expansion projects, which are periodic. So in '17 -- in Q3 '17, we had a very high earnings due to such capacity expansion so the comparison in Operator becomes a little bit skewed. We have a strong sales pipeline, but unfortunately, too slow conversions to projects and revenue in the Operator Division, and we're working to reach the 15% medium-term EBITDA target during 2019.
And with that, we'll hand the word over to Odd to run us through some of the numbers for the quarters. Odd?
Thank you. As Oscar has already given you all the basics, we are quite happy with the development during the quarter. We have seen a considerable growth. We were very close to doing our first [ SEK 1 billion ] quarter, and we believe that will happen soon, hopefully. We have seen a stable gross margin in our Enterprise Division. We also see existing customers developing very well. The Operator Division is, as Oscar pointed out, still suffering from some slow conversion of existing orders into revenue and projects. Vehicle is performing very well. If you go on to the next slide and look the at gross profit and the EBITDA quarter-over-quarter, starting with the gross profit, we maintained the level we had in the second quarter even though the third quarter seasonally is a slightly weaker quarter normally. We have a very good momentum with some key U.S. clients. And as I said, Vehicle continued to perform well. These are the effect of -- these effects on both EBITDA and gross profit, and I'm not going to spend time on both these pictures in the business. So let's move on to the year-over-year comparison, gross profit and EBITDA. What we can see here is that apart from the -- what we see is a solid organic growth, underlying organic growth. We also had very significant contribution from the acquired businesses, Unwire and Vehicle, both of them are performing very well. We do have an unhealthy (sic) [ healthy ] underlying organic growth, which is obviously a very important factor. Moving on to operational efficiency, Slide #16. The gross profit is, as I'm sure all of you know, the primary bottom line driver for us. And gross profit per transaction has been rising as the traffic we've seen has increased to some high-margin markets. The revenue and gross margin, however, at the end of the day, depends very much on the mix of terminating markets. But this, we've seen recently some increasing traffic to market where we have a higher gross margin. Unless there -- well, we take other questions afterwards, right?
Yes.
Well then, I'll get the word back to Oscar.
Thanks. So we thought we'd spend a few minutes talking about our company in a wider setting, especially as Oscar has just joined us here. So with that, a few words on our overall story, Oscar.
Okay. So moving to the story. So I must say I'm super excited to get into CLX and understanding the business and understanding the opportunities. I do believe that there are strong opportunities in many, many different areas for CLX. The way we see this is if we look at slide -- at CLX at a glance. We deliver customer engagement. So we're basically using mobile technology to help businesses engage people through mobile technology. And the bottom line to that is very, very simple. It's the main channel is very hard to use, it doesn't work that well; the phone, hard; and TV, advertising, all of these kind of other channels that you have is very hard. But then you have this channel directly to everybody's kind of pocket because the medium and the device, they always carry with them. And that's obviously, a very, very strong channel to the business, and that's -- to the consumers, and that's basically why this market has grown so large over the last couple of years. And therefore, we address a growing multibillion-U.S. dollar market in both messaging and SMS and richer media formats, in voice and in video. Counting this up, it's a large and growing multibillion-dollar U.S. market. So interestingly, when I thought about this business, it has 100% penetration among consumers. I've asked everybody that I met since I started, and I've yet to find one single person that has not been exposed to this type of services. I have not found one single person that I met that has never received a text message from a, "don't be late for your doctor's appointment" or "here's your flight ticket or check-in information" or delivery information or something like that, or that have never made a voice call, for example, to an Uber app -- from an Uber app or any such other services. Or that have never done a real-time video call, for example, with a doctor. So, so far, I've not met one single person, so I'm kind of making a statement that it's -- that roughly 100% consumer penetration among users in the world. It's the same type of penetration for this market as for mobile phones. It's very, very few markets that has that characteristics. We reach 5 billion users worldwide, and we reach them within seconds. A typical statistic is that 90% of messages to mobile phones are almost read within 90 seconds...
Sorry, 3 minutes.
Three minutes. 90% of the messages to mobile phones is read within 3 minutes and reach 5 billion. We deliver 25 billion transactions a year, that is 5 plus -- or engagements to each mobile phone globally in the world per year. If we take in our core market, that figure is going to be significantly higher. So we probably, in the U.S. and Europe, deliver some 10, 15 engagements to each mobile phones across all of those geographies per year. Customer satisfaction is generally very high due to this type of messages is primarily integrated into the customer journeys of big enterprises. This is an airline who wants to communicate. This is your ticket. That is not seen as spam. Or this is you wanting to contact a ride-hailing business, and you call them. That is not seen as spam. That's kind of part of your customer journey, part of your engagement to that business already. So customer satisfaction is generally high. And we see that cloud communications via mobile technology is becoming business-critical, and it's moving from early adopter to early majority. A lot -- portion of our revenue as of today has been driven by the digital natives, the true online companies improving their customer journeys, and we see that kind of development going out into the mainstream. Our chairman was at a hairdresser the other day and he got a text message from the hairdresser saying, "Don't be late for your appointment." And then he asked the hairdresser, "Sorry, how did this work? What benefit does this give me?" And the hairdresser answered, "well, this type of messaging, they reduce 2 no-shows per week for me and I pay whatever, $5.00 a week or something like that." And I think that's a very good kind of -- it's a very, very good example of how this type of business has really truly affected the no-show reduction for the hairdresser on the caller. And with that type of business, you have a very, very large addressable market. And to her, this hairdresser, the business case of using this type of services is an absolute no-brainer, reducing 2 no-shows per week for her is hardcore money and the cost to do so is very small compared to the benefit. And then you can imagine the amount of businesses that will or are already engaging in this type of communication. We are one of the world leaders. We're leading cloud communication platform for messaging, voice and video, so we are one of the leaders in this market. We are a preferred partner to the world's most demanding enterprises. We're serving 8 out of 10 of the largest U.S. big tech companies. So you a take a list of all the brands that you know, the biggest brand from -- biggest tech brands from the U.S., we serve 8 out of 10. It's a very strong statement, but it's a statement to our quality and to our ability to deliver this type of services on a global level. And the [ tip-top includes ] companies who are truly, truly top tier. And we also, very interestingly, do software solutions to mobile operators based on the same underlying platform, which I think is very strong point for us, which singles us out from the competition, and I do think there are increased opportunities for cooperation between these business units in the future. Moving to the next slide here, Slide 19. So growth markets are focusing -- our main market, as you know, is messaging, and we believe that the market for messaging as of today is around about USD 10 billion. There are market estimates, it varies between $10 billion and $50 billion. So there is no -- we choose to take the lower part of this range to be conservative, but this is primarily text messaging. And seeing a market from a relatively simple technology as text messaging growing to that size, that has something and the reason is very simple, 100% customer penetration, 98% open rate and everybody is a trained user. So the power of the mobile channel I think is proven by this figure. What's happening now though is the text messaging market is moving to richer media messaging and more conversational messaging, which we'll show a little bit later, which we believe, naturally, given that the messaging channel becomes more powerful, it will grow market growth in the coming years. Then we have another part to this market, which is traditionally called CPaaS, or Communication Platform as a Service, and this is basically when you add a layer of software intelligence on top of the actual messaging transaction. So first, this market was just send the message to my user, that's one part. But then you could also start to add a layer of software intelligence. I was talking before about verification and number masking. So in the verification business, we would not -- we would sell -- we verified that this number belongs to this user or that this main address is connected to this phone number, and there, we're having a service where we may first send out a text message. But if the text message is not answered to, we may make a voice call. And then we may do something else, and we sell the actual verification, and we have added a software model on top that does that type of verification. Or in the number of masking business that I talked about before, we are not only connecting and delivering the voice call, but we also mask the number, which for a ride-hailing business is super important because if the number is not -- the mask number means that the user don't know which phone number the driver has, which is very important for a ride-hailing business because otherwise users may contact the drivers directly in order to get the lower price. So that's a super business-critical revenue assurance feature for a ride-hailing business. Or other sub-services. And in the CPaaS part, that is adding the software layer, and there are various degrees of market estimate. Juniper sees a 35% CAGR, Gartner expects a 50% and IDC forecasts a 57% CAGR. We're seeing that this part of the business is growing strongly. We're seeing a large demand from our customers, and this is why we obviously being the messaging leader here need to focus and acquire better investment to capture this type of market growth in this type of segment where it's a very, very natural step for us being as profitable as we are. Looking down to the next slide, I touched on this before. But in principle, I do mean it when I say it's a 100% consumer penetration. I haven't met one single user that is not -- or one single person or consumer that has not used to these type of services, which means that the use cases are infinite. Or the number of use cases that we're delivering and see in the future, it's very, very long list. It can be banking, health care, Internet commerce, utilities, media, ride-hailing, transportation, travel, and I can probably go on and on and on here about the use cases. We are delivering and then can deliver in the future here, because a very large portion of the world's enterprises can actually be our customers or our channel partners' customers. We're also seeing growth here. I think we're seeing a trend shift in the world of CLX where we're moving to a broader set of services than messaging, both from SMS and to more than messaging and also richer media messaging. So I'm going to talk a little bit about those. So voice and video, so we're doing cloud-based capabilities for voice and real-time video, that is somebody has an app and they want to make a call from that app. It's that type of calling system is something that we do deliver, and we see that we can win the world's largest brands on this type of services as well. So we're seeing the top brands in the world actually coming to us on the voice business as well, which I see is very impossible -- positive. And we're focusing very much on the ride-hailing business. We have traction in that business, so we're focusing on penetrating that market selectively. And here, like I said, we're doing a number of masking with temporary phone numbers which safeguard privacy and improves revenue assurance for ride-hailing businesses. The other very interesting area is personalized video where we have a unique, personalized video to each recipient. This is, if you say messaging 1.0 or 1.5, we would send -- instead of sending a text message, we're doing this primarily in the U.S. today, we're sending a video message. Unfortunately, I cannot show this video on the call here today, but it's a very powerful video. So we work with customers, they map out the customer journey. And instead of sending a text message, the users receive a video message into their inbox. And we are working this through a couple of big companies, and we see we very good stats from this. So doing this type of video message, we see a 17% annualized churn reductions for a major U.S. wireless carrier. So they are basically -- they map out their customer journey, and they said, "all right, I have an issue with the customers not understanding my phone bill." So then they map out, and said, "let's send a personalized video message describing the lines of the phone bill to the users when they receive the device." And this video message explains the phone bill to the users, and thereby, reducing churn and with 17%. And you can imagine to an operator, reducing churn with 17% is a huge amount of money. Churn reduction is the most important metric for the marketing organization of the carrier. And you can imagine how many carriers we can sell this to. But if you expand this, how many subscription-based businesses can we sell this type of services to, and I think the list there is very, very long as well as we see by the pipeline. It also has the highest improvement in Net Promoter Score of any marketing effort that this carrier has done in the last year due to this being a very, very direct message. The interesting thing here, what we mean personalized is that we, actually, on the fly, create different variations of this message. They actually connect into the CRM of this particular carrier and pick up, well, user A has selected product A, B and C, and there, we on the fly create a personalized message to this carrier. So it has 36 different variations of the video, making it very, very direct to targeted to this individual user. I think this is very, very powerful. The next thing that we see is next-generation messaging. If we move to the next slide, Slide 13. We call this the post-app era. We're seeing new messaging formats coming out. So basically having messaging formats while you can both do real-time feedback or you can have a conversation with the brand. So it's not only a one-off like text messages, it is a -- you can have a conversation with the brand in a chat-like experience. And as you know, the younger generation, they prefer chatting or messaging-based communications over voice-based communications. So that type of communication in the customer journey, in a message being very, very powerful. It also provides rich dynamic content, so you can have pictures or videos like you saw in the previous slide, and it becomes an app-like experience. So you can actually have buttons or action buttons in the message. So imagine your phone and in your inbox, you get an almost -- when you click on that message, you get into an app. So you no longer need to download the app because suddenly you get a text message in the right time, targeted to you only with the right information for the thing that you want to do right now, and it looks like an app. So you click on the message -- in an airline's case, it would look a little bit like this. Boom, check-in or change seat. You have that directly available in your inbox. A large portion of our customers believe that this will replace a portion of the app traffic because the 27th airline you have, you don't want to download the app. You just want to get the message through inbox and have the same type of experience like an app. So the post-app era is something that is discussed highly in the customer excellence, customer journey organizations when you present this type of messaging formats to them. So obviously seeing both voice growth and then personalized video and this next-generation messaging formats, we see strong market growth in the coming years and then we see a very, very interesting development for this market going forward. So future growth, like we said before, we have a strong pipeline with several U.S.-based global digital-native companies. These are core -- one of our core basis. We have a lot of customers, but we see we're very strong with the world's largest enterprises. We see considerable interest and increasing revenue with the Vehicle personalized video. We see the Sinch business that we acquired before, it was -- the number masking for ride-hailing developing well, and we also see an improving pipeline and key customer engagements for the Sinch number verification business. And we see us investing in the rich media, conversational messaging, RCS and OTT chat apps. It's a necessity to capture the market growth potential going forward, and something we feel very, very strongly we'll do in the coming quarters.
Thank you, Oscar. And with that, we'll open up for Q&A.
[Operator Instructions] We will take our first question from Staffan Aberg from Carnegie.
So I'm looking at the Operator Division, hope you can help me understand how to think about how future-proof it is. For example, how much of sales year-to-date in the Operator Division relates to legacy product that won't recur when networks modernize? And how much of the sales do you believe would remain and possibly grow over the next few years, for example, a software for fraud and security? And also on Operators, the Q3 margin was above the 15% you are targeting. Is there any particular reason for that?
So question relating to our Operator Division. You'll know from previous press releases, we focused our agenda somewhat in our Operator Division, moving away from certain areas and focusing on areas where we feel we have a stronger offer. Generally speaking, our product portfolio has a mix of maturity levels, if you so like. Some aspects are forever. Our products around security and signaling and so forth. Some are more tied to a particular technology. I think it's worth highlighting the very or extremely long sort of time lines in this type of business if we compare to our other business. These are not -- operators do not make swift decisions, and these businesses sort of take on for a very long time. When we look at this particular quarter, we see [ mix ] orders, good orders from a few select customers, that's the sort of normal name of the game. We'll have some variation between quarters. We're glad to see an underlying improvement over the past few quarters, and we work to reach our 15% EBITDA target.
To fill in a little bit about that, we do see and explore interesting future opportunity, which are combining the Operator business to some of the Enterprise business in a better way. And that is also a reason, the decision about cloud core and IoT when we made those decisions. We see opportunities in aligning those business in a better way where they, frankly, 1 plus 1 equals 3 in a better way. So that's our focus right now in aligning this organization, and that will talk -- think about what that is right now, but we're exploring a couple of opportunities for that.
Okay. And my second question relates to you, raising the gearing target. Does that mean that you have circled in on a potential target? And if you don't want to answer that, I have more general question on this topic. What type of companies are you mainly looking at, at this moment? Is it expanding your current portfolio offering by adding new services or functionalities? Or is it more bolt-on acquisitions, both in new -- in existing markets, but also expanding to new geographies?
It's a well-focused agenda. We have mainly 3 focus areas. One is the bolt-on acquisitions, expanding EBITDA growth, volume, size. The other one is the new technology or go-to-market, think Vehicle or Sinch. And the third one is a geographical market access [ meant for ] if we want to target a specific geographic area, acquiring a team or a company in that geographical area.
Which one of these 3 focus areas do you find most interesting right now?
All of the above, that's why we have them. I think all of the above. When we selected between the long list of different focus areas, these are the top 3. Which of them we find most interesting, and then it's interesting in a couple of different categories. And how we execute on that agenda is obviously also where do we find targets at a suitable price that has the right characteristics, so it's very hard to answer that question. They all have various interests in different ways. As you can see from before, I mean if we talk about the post acquisitions, only -- I mean, we've done -- I mean, if we think about Mblox acquisitions fantastic acquisition, bringing us to the U.S., putting on a global scale, making us much bigger, but more on the bolt-on scale or also geographical access, that is probably these 2. I mean, of course, that was the right decision for us to do. If we look at the Vehicle and real-time voice, we did those adding product and adding go-to-market into new markets. So all of these 3, if we take those, are very good acquisitions. But having a strategy to only execute on one tangent, I think would be the wrong strategy. A strategy should be to kind of take the market position and the right market position, and then you need to execute them several different aspects. So saying that one is still the priority I think is a limiting strategy.
[Operator Instructions] We will take our next question from Fredrik Lithell from Danske Bank.
I just have a question on -- maybe 2 questions, but the first one is really on your wording around your -- you want to push up investments and that may impact your earnings, the coming year. How -- can you sort of translate that into the divisions you have and where we should sort of expect you to maybe increase the pace of investments? And in combination with that, the earlier sort of acquisitions you have taken on and now the Nova platform since last winter being fully in place, do you have any further sort of efficiencies to take out from those earlier M&As? Or are we fully done in terms of the costs you have in the quarter?
So I think Oscar mentioned a few areas on Slide 4 in the deck. It's correct that we migrated our traffic to new transaction platform that's truly built for scale. That doesn't mean we're, by any means, finished in targeting internal efficiency and driving automation. So absolutely, a share of our efforts here will be focusing on areas, which just improve our business as it looks today. Then the second focus area is messaging in a broader sense. We talked about conversational messaging, about handling rich media. It's more complex for an enterprise to handle and send a rich media message and deal with replies than it is to send a text stream. There are various, I think, assets around that, that you need to provide in order to enable customers to use this successfully. We'll continue work on that. We've talked about personalized video messaging, which is both a product, but also a lot of go-to-market. It's a product, which is receiving rave reviews whenever we go to clients with it. So that's a sort of simpler go-to-market sales investment. And lastly, it's an overall effort in improving our marketing branding position and channel partner business. So we see genuinely quite a lot of opportunities, mainly messaging, also real-time voice and video, and we think those opportunities are large enough. It's enough of a scope that we want to concentrate our investments on these areas.
Well, I think it's -- this is Oscar. It's a very natural move. I mean, you see certain market segments like this. We mentioned the CPaaS, added software -- [ added software category ] is growing with 35% to 50%, 60% a year. I mean, it's -- and us being there or one of the messaging leaders in the world. It's an obvious focus area to capture part of that market growth. And in such type of markets, obviously growing that fast, but you need to be on your toes in order to capture market growth. I think it's a very natural step to take a portion of the EBITDA growth to invest in those type of markets to drive further growth in the business.
[Operator Instructions] It appears that there are no further questions at this time. I would like to turn the conference back to the host for any additional or closing remarks.
So thank you, everyone, for calling in, listening to our story and seeing our progress. Very glad and warmly welcome to our next event, that will be Q4. Oscar, if you want any other last final remark?
My last final remark is probably I'm very excited about this business coming into an area, which like I said, 100% consumer penetration is very interesting. Seeing the type of market growth that we're seeing is very exciting and seeing the type of customers that we engage with. And the volumes that the customers engage with is a very strong position to be in, and I'm looking forward to drive the business further in the coming quarters. And hope to see you all in the next earnings call. Thanks a lot.
Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.