Sinch AB (publ) (CLCMF) CEO Oscar Werner on Q3 2021 Results - Earnings Call Transcript
Sinch AB (publ) (OTC:CLCMF) Q3 2021 Earnings Conference Call November 2, 2021 9:00 AM ET
Ola Elmeland - Investor Relations
Oscar Werner - CEO
Roshan Saldanha - CFO
Thomas Heath - Chief Strategy Officer & Head of IR
Conference Call Participants
Fredrik Stenkil - Nordea
Daniel Djurberg - Handelsbanken
Anders Johansen - Danske Bank
Good day and thank you for standing by. Welcome to today's Q3 2021 Interim Report Conference Call. At this time all participants are in listen only mode. After the speaker presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions]
Now, I'd like to hand the conference over to your first speaker today; Thomas Heat, Chief Strategy Officer, and Head of Investor Relations. Thank you, please. Go ahead, sir.
Thank you very much operator and warmly welcome everyone to this Q3 2021 conference call with Sinch announcing the or discussing the Q3 results we released this morning. With me in the room today is the Oscar Werner, our CEO; Roshan Saldanha, our CFO and Ola Elmeland in the Investor Relations team with myself.
With those opening introductory remarks, I'll hand the word over to Oscar.
Thank you, Thomas. And thank you all for listening into this Q3 designation from Sinch. So without further ado operator, if you go to slide number two, please. So Sinch revenue past 12 months, SEK14 billion adjusted EBITDA of SEK1.2 billion in the past four months 2,424 people and present in 49 countries. This is then excluding the, obviously recent acquisitions or up to some almost close to 3,500, 3,600 people, if you include all of those acquisitions.
We do customer engagement through mobile technology. We do communications in messaging voice and video today. But as you've seen, we have significantly strengthened the voice part. We are adding an email part and we added a strong business unit focusing on the SMB segment as well as we're rapidly expanding outside this definition and we will update it as the acquisitions close.
If you do SEK190 billion B2C engagements per year, this is close to 20 per mobile phone on the planet and as you can see, this is going up gradually quarter on quarter and again, this is on the messaging side, we serve eight out of 10 with a lot of tech companies. We're typically one of their top providers or the top provider of telecommunication services and this is a testament to our quality. They truly -- this is a quality conscious buyer who really wants a global high quality delivery. That's when they choose Sinch. That's where I think truly stand out against any other player on the planet.
And this market is fascinating because it's got a 100% consumer contraction. We're talking about the communication between every single enterprise or everything in business in the world, every single consumer in the world, over every channel that you are using, that's the size and the scope of the market. It is an extremely large and very attractive market that we're in and we're one of the top two players in this market.
We've been profitable since our foundation. We have never needed one single dollar to fund the operations of the business apart from the $10,000 share capital that the founders invested in the first round. Every single dollar that we brought into the company has been for M&A. So very high profit focused, very high, high cash flow focus that we had during the business from its inception.
If we go to slide three operator please, third quarter highlights. We had total revenues growth of 122% organic, growth at 41% from the revenue level, gross profits up 86%, organic gross profit growth, 20%. We're continuing investing in OpEx in product and go to market and we had adjusted EBITDA up 64%.
The number two is acquisition of Pathwire and MessengerPeople. Pathwire is a one of the largest email providers in the world and based out of San Antonio, Texas and present in a set of countries. They also have with some 100,000 paying customers. They had a proven developer centric go to market models of truly addressing the developer persona with their go to market model, which is something Sinch has not been strong up and has not been focusing on. So we're truly adding two things with this acquisition.
One is a very, very strong email platform and the other one is a very strong go to market model to the specialty email developers. They have brought results and started to do the same for text messaging for developers who wants text messaging as well. So they're clearly taking the steps to broaden this developer go to market.
And MessengerPeople is a pioneering customer care through messaging. They have some based out of Germany and Munich in Germany. So some 700 businesses and customers. It's a relatively small company run about 50 people, but innovative and one of the concept and messaging leaders in Europe, and we've significant strengthen our conversation and messaging business and especially our European go-to-market and volumes in the segment. MessengerPeople have closed on 1st November.
We're also doing investments in scale systems and people and we have a fourth quarter where we projected to close four transactions. We have closed MessengerPeople. We are forecasting Intelequent message media and Pathwire all during this quarter. And as you can imagine, we're moving from, if you look at the Q2 2020, we were 820 people roundabout. If you looked at the end of Q4 2021, we're going to be close to 4,000.
This is in principle over 18 months, scaling the business at four times at 400% in terms of staff and in terms of most other financial metrics. As you can imagine, when you do this type of extreme growth over this short period of time, you have to take investments in order to just scale the business. And I don't know how I could do that otherwise, right? Also the measurements that we take, we need to do it before the deals close cause otherwise we can time on the close of them.
So obviously we got the investments we're taking now, but they're actually geared towards handling a much, much larger organization. So the proportional share of them when these acquisitions close will be much, much smaller. There's maybe building out capabilities like ERP, CRM, HR process, innovation systems, data platforms, et cetera, in order to just handle the skin.
We only take the straight integration OPEX as integration where, or is diligent about that. It's only when it's true integration, we'll take it up, but we also have a set of scale-up cost, right? Just a new ERP system, it's HR system, et cetera, right. And those typically, or we don't leave it, leave it, leave it as a level of integration. So they come to the, the da and you see parts of those investments here right now. And the context you should have is going from 120 people to some 4,000 over eight months, that's the complex.
And we're preparing day one activity. So I think we're doing well on these where we're gradually improving. We have a strict well-structured process for that. And also, so, you know, in Intelequent we see their growth being low, lower than the cinch growth, which will communicate that seems the acquisition. And we're preparing to invest part of their cash flow and profit to increase the growth too much to seam since group growth, right?
So that's the piece of the fundament in dollar U S investments that were taken out of the, out of the Intelequent Intelequent EBITDA, if you will, in order to increase growth. And we think that's highly possible, and it's very, very concrete operators slide for this. We see continued broad-based growth is something we worked on for a long, long time. And we communicate, but it many quarters ago. And we also communicate that we see now water-based growth outside the biggest customers that we have the big packs from the us.
And we see that continuing this quarter, which I'm very, very happy with. So on the gross profit level and 86% Q3 and organic gross profit 20%, and the majority of this is coming now from the broader base while the bigger, the bigger tech customers in this quarter, having a lower growth than average because we have some volume, volume, volume, volume discounts with them. I think it's very natural as well, but when, when customers drove very, very large, well, they come and negotiate price. And this is one of the quarters where we didn't go share the price fairly because the volumes are very, very large.
But I'll say it said in this quarter, they don't contribute to so much the organic growth but there are contributed, but mainly driven by, by the door to Facebook. As you can see that you can see higher growth in transaction volumes and revenues up at 41%. And there are three things that are affecting the gross margin. First it is a carrier pastoral fees. So basically operators have increased prices. What happens is they increase one quarter and then we increased increase our prices in the coming quarters. It is also the renegotiating volume discounts with some of our largest customers, which has an impact when it happens. And then it takes off in the, in the quarters often. And then you have some mix effect as well. And depending on in what countries do we sound and what margin do have into the specific countries, but for three main reasons to the, to the gross margin.
And that's the reason to the difference in revenue and gross profit, gross profit growth operator slide buy-to-lets we're adding two volumes in messagings. We see you, we do 46 billion transactions through slips to three it's a 229% increase year over year. And 97% higher revenues with 35% organic growth on 67% higher gross profit when 19% organic growth continued growth rate growth and customer types.
And you should know the SPI customer base is still growing slower than the same-ish, which will affect the combined growth in Q4 when it's first quarter, that they are actually, reporting US non M&A. We all have ever seen positive effect. We worked hard with that customer base and the sales team, and we're seeing positive effects in turning that growth as we had projected from start. But it's taking a little bit longer than that to get up to the fullest growth level than the 12 months.
But we see no structural reason to why this space would grow slower than this inch base. When we're applying all the same models as we're doing all the same site operators slide six days we are extending our conversation API where the better it is for best minutes with telegram and can Cal talks and making this a, like, you know, even broader covering a lot of more channels. And you can see the number of channels we're covering for the price. This is very, very powerful.
The communication landscape gets more and more complex with more and more messaging apps and handling all of those and understanding how to handle them in various jurisdictions and various processes is, is pretty tough. And that's why we combine them with our conversation API. And again there's no reason why we couldn't add the email services or other services to this as well, and go in for what basically right operator next slide, please.
We have healthy girls in the voice and video segment. I saw this at a very strong growth before COVID and then took a hit during COVID it's very logical cause one of our largest customers are the right heading customers in the segment. And obviously you in COVID and locked down, that's, that's a slower growth. So it's been a bit, a bit lumpy over, over the last quarters here. And when I was seeing them coming back to a healthy growth projected action with 23% revenue growth organic at 26 and 44% gross profit growth with organic at 44 previously, we communicate that, that we had a temporary traffic and low gross margin, but has now ended so gross motor is going up from eight into 28 as per, as per previous communications in Q3, and also preparing for the Intelequent closing. This is cinch voice specimens, and this is combined with Intelequent offering, and it's a good combination where we're getting strong, both in the higher levels of programmable voice, more software and the lower layer level volume, the voice network.
And we see very strong growth opportunities for this business going forward. But we're investment investing in, in, in growth initiatives, both on the product and the sales side, just a couple of examples, like Intelequent going into them. They have the best voice network in the U S a broadest reach in the us, but the highest volume providers in the U S but they only are spending, I think it's around about 10% of their, of their, of their OPEX in sales and marketing. And that kind of relative to what we have seen or what any other CPS player have a very low investment in, in sales and marketing. And we just say, hey, this fantastic network, if you invest more in sales marketing, we would get more out of it. So it's things we have done before. Things we've proven before applying the same mobiles, but selling more of a, of a very, very good asset that we have or I operate a slide, eight booze.
We have this corresponding performance on the operator segments, and this is the same operator segments and drove since Q4 28, driven primarily by the SPI acquisition, which had a, you know, a, a, a an operator, an operator business in them, and healthy growth and profitability invokes intranet, they are businesses in Q3. We do expect continued earnings, qualitative volatility between quarters in this, in this, in this, in the segment. And then we have Intelequent is round about half of the real profit. This is geared toward operators, so that, that would be added the operator segment going forward. And that's a significant piece, which is going to be the largest piece of our operate offering and going forward, and a very stable, very high profit on the side and a bit lower growth than the general specimen right.
Operator go slide number nine. These are the acquisitions. I must say we're, we're extremely happy about all the acquisitions we've made lately. I think we have truly moved seems to be one of the top two players in this business. On all accounts, you can count revenue profit adjusted to da message volume called volumes mail volumes on any, any metric you would count. We would rank us as one of the top two players in this very attractive market. I think we've gone from being a messaging provider and then adding Intelequent to being the novice voice provider in the US adding message media, being the largest provider to SMB segments in the world, adding 65,000 customers and a strong online go to market mobile, to SMBs, adding path wire, adding a strong email product and a strong developer go to market and, and thereby covering the three biggest channels that I think we all use as communication between ourselves and enterprises.
We all use messaging channels like text or WhatsApp or ABC. We all use sometimes voice, and we all use email, and none of those channels are going to go away and being one of the very, very few companies on the planet that can offer all of these free services at scale on a global level is a very powerful position to be messing with people, a smaller transaction, really moving us forward in the conversation messaging space. So we're looking back I'm super, super happy, and all our teams are very happy on the excitement in the sales teams about the ability to cross sell these different services is very, very high.
Look outside Chandler the performer here in the streets, the greatest scale you can see the very, very significant moves we're making. We're very decisive about being a leader in this industry. There's nothing that would stop us from that. And we're really going for that. We think the market is very attractive in SeaPass. We have our, our ice up on, on, on being one to talk to providers, and that's what we are with is psycho sessions.
You can see going from, from the strong organic growth that we have, and then adding Intelequent message medium pathway on the gross profit and adjusted EBDA, you can see the monumental shift that we're doing, and this is also why we need to, and think it's prudent to take the scale-up investments in order to handle all of this, all these acquisitions. And we can also see the power of the combination of our growth model.
We have strong organic growth. We have been raging between 25 and 45% over the last quarters. This quarter is, is 20%. There's no reason we don't see any structural change. It's just one quarter becomes super good, like last quarter, this quarter, a little bit, little bit lower, but there's no structure change in that. But we see the very, very strong, organic growth that we have had over the last, many, many quarters over the all five years. And then we're adding the very strong M&A growth engine that we have. And combining these two, we have had on average for the last two years, that all five years, one got 50% growth year on year, you know, roughly half of that 25% being, being organic and roughly half of that being, being M&A driven. And I think that drove them all, but it's just very strong.
And we count them gross profits, and it's a very simple reason for that. You cannot compare this business unit or this business businesses on the revenue basis because a path wire house like 80, 85%, 90% gross margin, while a massive investment fast 20, 25% and comparing those on revenue, you would, you will get overweight on the, on the, on the, on the, on the messaging side and, and, and under prioritize the pathway aside, it's compared to revenue, right? So we need to compare it on lifelike basis and the, like, like basically the value you create and the value you create that basically the gross profit it's as simple as that. And I think it's, it's, it's it, it risks very much schooling. And any comparison, if you compare it to anything else, the performance loss by month, 10 month revenue is 21.3 billion.
So you can see the scale up we're doing here. I think it's a report fed 14 roundabouts or 12, sorry. And Russia was giving me a look there, sorry. But before my 21, the gross profit off six, 7.8 and adjusted it the da of 3.2 billion, you can really see that the growth in the business that we're driving here. All right, operator slide 11, please. We're also adding structurally here, right? But they're not only going to adding company on top of it. It's very carefully selected and it's bribing structural competence to the vestments to consist. Sinch has been strong on the enterprise, go to market or message medium pathway.
We're actually pretty remote. So strong pathway are being very strong on the developer. Go-To-Market finding out thousands of developers each month, having a hundred thousand customers, the really adding that go to market motion, and we will let them around the developer go-to-market for all our products, because frankly they're just so much better than, than, than Sanchez on that.
And then the SMB market is basically a message media SMBs are business users. Think of the hairdresser on the corner to go see an online signs up with a webpage, but it's not a developer, right? It's a, it's a business user. Who, who would you say you use an online graphical user interface basically, but 65,000 customers. So that's also an online go to market mobile, which messaged media is it's the leading player in the world. So really adding true competence as well on the go to market model on both of these acquisitions, which we're very happy about and adding true online, online, rapid, rapid customer acquisition, go to market in two very important sentence, right?
Operator slide message to people. We're leading extending our, our strong position in the conversation, messaging space, the MessengerPeople being one of the leaders in Europe, and they're selling a integrator applications to mid-size businesses, primarily focusing on the detail customer care, which is a customer or persona segment that we have not focused on so much and the basically operating the customer care for medium sized businesses in a more efficient way via WhatsApp, RCS vibrate to calc fork attached to our rights in a, in a very intimate way. It's like an online self-signup.
You can sign up online if you were to contest the product and see what it is. And it's a really good and interesting if you have the experience, which is growing significantly and rights integrations TWWO wavy. We kill the CWW October 28. You in February 20, when migrating customers on supplier to our shared global platform, as we speak on the supplier side, we've gone pretty far, I'm on the customer side where all of those made by and that's happening as we speak. And we're going through this project and we have engineers and operations people and product managers on this progress right now.
And the goal is at the end to shut down the platforms and really the operational operations. And they just come out and also having an initiative to scale way, this concession messaging business, which is very large and leading in Latin America, in other regions with good results, ACL of bit close to the end of September 20. We're starting to, we have terminating the international traffic to India, leveraging the ACL direct connections. We have wait that strategically to integrate the platforms because we think that can be done later. And there are so many specific things in India. So we have prioritized the WWN waiver without we wait to get it up in order to not lose too much at once. And what we're then selling chat layer conversation API offered via WhatsApp in India to Indian customers via the India via the Indian ACM sales teams with good results.
So really just seeing the cross sales there, and even though we're prioritizing the platform integration way before the ACL SAP chose to date in November sales teams are already merged. You cannot see the difference across 19 countries, and we mix the leaders, pick the mix. So our state leaders from, from STI, a lot of the account managers, either in the US or from FBI at that point, and you have this mixed all across sort of put, integrate them or migrating customers and suppliers on our shared global platform with the aim shopping that's up and down as well. And the PTP mapping products for operators are aligned with Sage operate software offering and moved into that route from an operating and controlled perspective scale up rapid increase as you can see, going from eight 20 people to 3,800, 4,000 over eight, 10 months requires a scale up and core functions.
And that's what we're doing. And it's all across various different areas. Operational. It is relatively dramatic. We need to do it before the closing. And obviously then we take a little bit too much cost now compared to compared to our EBITDA, not right now, but that will obviously when we get the new ABPA be much lower in proportion to the, the day that we have them. And then we're also taking a little bit more cost now, which we don't need to take later.
We intend to kind of slow in the growth of the OPEX investments in this area going forward, because we're already taken the cost to scale to that level, right? So long-term, we're just seeing we're going to grow. We're going to grow, you know, optics in line with GP, but obviously in this type of situations, you need to be to take it a little bit up front in order to, but the integrated to handle the very, very rough scale.
And then we're planning as having integrations we're having a set integration, with the leader coming from Thomson Reuters. She is used to handle from serrates did work acquisitions a year when she was there, right? So this is say, an experienced person who really, really loves every division comes in and wants there to be more, which has a very positive thing, right?
We're now doing integration planning with Intelequent find in February expected to close in age to the regular approval process. We can go ongoing and we're doing down now, we're doing integration planning with the teams in regular cadence may think we're not allowed, and we're not doing integration execution before closing and focusing it on cross sales on voice and messaging. Students seem unintelligent customers. And in principle, a hundred percent customers, long voice and a hundred something and telecom customers won't want messaging.
So I think that's a very good opportunity messaged media site in June expected to close in age to at 2012. And we're happy to say that we just received the regulatory approved approvals for message media, like you have asked before, and we projected the Q4 and I would just receive them on where that nobody's taken out, preparing for close. We're shifting the backend to cinch connectivity and then assessing joint growth opportunities.
They want a set of our products. I chat later conversation I've been integrating into that messaged people sign in September closed in first November. And we're assessing integration options while also driving. How can we drive their growth into other regions? Foster pat flyer signed September 21 expected to close age to 21 regulatory processes ongoing. And we're also doing immigration processing projects here. We're getting to know the team.
What are we going to do? Who sells well and identifying cross outs opportunities. And here there's also very large process opportunities. I would say like 100%, but the same space base, either using email. There's not a business in the plant on the planet that is not using email on some, in some form of communication, or maybe there are a few, but very few. So in principle, 100% of our customer base have an email service.
I'm the oldest and 10 patrol Sam. 100% of Intelequent customer base have an email service. I mean, the cross sale pathway was already sending text messages to their base and they will add the voice, most methods, moist voice offering as well. So very interesting and exciting opportunities. Our sales teams are very, very excited when they talk about the opportunities to them. They're almost drooling over, over the opportunities.
And they're really saying, Hey this is, I can sell up and I can sell this. And right now we're putting the structures in place in order to handle all of those cross sell opportunities that we can. Revenue-wise or GP wise, it's going to take a little while a couple of quarters, because we've got to close in Q4 to get addressed to customers in Q1, Q2 and then the customers are going to -- they're going to sign the customers, and then you need to port the profit, right. Then that takes -- it takes a quarter of two to port the traffic. So that's how it is, but we all have very strong signals from the cross-sell opportunities.
All right. Roshan financials?
Thank you, Oscar. Yeah, looking forward to close all of these transactions here in Q4 have asked communicated earlier and, and happy to comment presence and comments on the financials. In this quarter we start with page 16, which shows the gross profit bridge.
As you know, a significant part of our revenues are paid to, to as cost of goods sold to mobile operators, we pay them to send messages in place calls but the rates they charge can vary differently between markets and therefore we focus on gross profit as a key measure. Here you see, again, high growth rates in Q3 and Q4 2020 imply tough comparables for us but we still have the organic growth rate of 20% for this quarter, which we are happy with and then acquisitions on top of that contributing 70% and then we have FX effects reducing the growth by 4% to give you the total growth rate of about 86%.
If you break this down into the segments we have messaging growing at about 19% organically. We have voice and video growing at 40% organically, and then you have the operator segment and since we are only talking about the organic pieces, the Sinch operator software business, that's growing 16% organically.
Inorganic growth contributions from SDI SEK247 million wavy SEK58 million in ACL SEK32 million. Note that the ACL inorganic growth contribution is for the two months that they were not included in the base for 2020 since we closed that transaction in September of 2020.
Moving on to Page 17 on the income statement adjusted gross profits coming in at SEK896 million for the quarter compared to SEK481 million last quarter. EBITDA coming in at SEK157 million for the quarter versus SEK215 million last quarter. Now EBITDA is including acquisition cost, integration cost, cost for share-based incentive plans, as well as operational exchange rate gains and losses. Excluding these items, we report adjusted EBITDA of SEK298 million versus SEK234 million for the same quarter last year, which implies a growth of 27%.
On EBIT, we reported a EBIT of SEK25 million versus SEK155 million EBIT last year. Again, EBIT includes in addition to the extraordinary items affecting EBITDA, also includes depreciation and amortization of acquisition related intangible assets. Excluding those adjusted EBIT was at SEK270 million for the quarter versus SEK219 million for the same quarter previous year. And then that financials are affected by currency transactions and currency hedging ahead of upcoming acquisitions, where is due in US dollar and in Australian dollar.
Moving on to the next page where we try to reconcile cash flow with adjusted EBITDA. Here you see that adjusted EBITDA is then reduced by paid interest, paid taxes and other items. Other items are primarily consisting of foreign exchange related transactions due to the large cash balances that we have in US dollar and cash flow before changes in working capital amounted to SEK244 million for the quarter versus a SEK145 million for the same quarter last year, again super happy with the strong cash flow generation in the underlying business at 82% for the quarter and 69% on a rolling 12 month basis.
Moving on to the next page, page 19, you'll see the full cash flow statement. Again, the cash flow before changes in working capital are coming in from the previous page at SEK244 million which is then reduced by a change in working capital of SEK735 million. We have of course, seasonal swings affecting working capital from quarter to quarter. In addition to that as we have commented previously, the SDI business, which has come into the group has had a negative working capital development due to all balances related to pre-closing, which we are working through, but we still have some way to get through that. And for the quarter, we also have effects from a few operated related complex, why we are prepaying operator charges in order to get both exclusive at the, as well as preferential terms into this contract, into these operating networks.
Now, this is something we have we have done quite often previously, and we have products that are, that are quite unique in the market to give us these advantages with operators. But again, we don't see this as a frequently recurring kind of transaction. And especially at this gate right on, on page 20, then you see a summary of the cash flow reclassification that we have done this quarter. We, saw that in Q1 and Q2 in our cash flow reporting we had part of the financing for wavy as well as the significant currency effects being, being recognized under operating activities and investment investing activities. We have now reclassified the financing for baby as a new share issue and also move the significant currency effects down to the bottom part of the cash flow.
We believe this reclassification now represents a better it gives a better understanding of the underlying development of our cash flows. And you can see here sort of the numbers for all the three quarters hopefully helping you in your analysis, moving on to page 21, to see the financial targets our financial targets are unchanged. We want to grow an adjusted EBDA per share with 20% per year, and we want to keep net debt over adjusted if the da at under 3.5 times over time. I just did the BDA per share grew 19% in Q3 2021 measured on a rolling 12 month basis on a quarter and quarter basis adjusted EBITDA per share had reduced related to the fact that we have completed share issues for the financing of acquisitions of Intelequent FatWire and messaged media.
Whereas that adjusted EBITDA is not included in our reporting in our reported figures. And that trend will then change as we go into Q4 and we consolidate Inteliquent, Pathwire and MessageMedia. Of course, those numbers will be included in our adjusted EBITDA for Q4 on net debt. We have a reported net that which is negative, which implies a cash position of 8.9 X measured on a rolling 12 month basis.
Moving on to the next page on page 22, you'll see how that would translate on a performer basis if you, if we completed all of the announced acquisitions and essentially ending up at 2.8 times adjusted EBITDA which would give us a net debt of on a performance basis of over SEK8.5 billion. The updated financial target, which was announced earlier, so it's not updated asset this report, but updated earlier is to maintain net debt to adjusted EBITDA under 3.5 times and that is what we continue to report here even on a pro forma basis.
And then finally moving on to the last page, page 23, where you see the key financials and the key KPIs for the consolidated group post-closing of the announced acquisitions of Inteliquent, MessageMedia and Pathwire where we see that gross margin on the last 12 months reported basis with the announced acquisitions would be 34% instead of the reported 24% and adjusted EBITDA margin would be on a combined basis, 15% instead of the reported 9%.
In the table on the -- or the graph on the right, we also represent them how our gross profit mix will change, where on a reported basis today we have 83% of our gross profit coming from messaging, a smaller part from voice and video, and then 12% from the operator segment.
If we had included the announced acquisitions, we would have 52% of our gross profit coming from messaging 15% from voice and video, 12% from email and then 19% from operators. So, so much more diversified gross profit mix as a result of the announced acquisitions.
That being said, I'd like to hand over to Oscar for final closing comments.
Thank you, Roshan. So from our perspective, we do believe that we see a very strong position created by our continued organic growth plus these acquisitions. We feel that all of these have turned out very well. We're super happy, and we think we are getting a very strong position in a very attractive market.
Number two we do see, on the gross profit growth has been a bit, a big discussion of course today. We see no underlying change for structural change in the business. We see that quarters sometimes come in, let the tire like floaters sometimes come in a little bit. No, we're like this quarter, it has his reasons like we have explained with the operators raising prices in a specific order or big customers are go renegotiate, renegotiate things, Morgan bonding and specific order on some specific facts, but there's no underlying structural change in our trajectory as we see it.
It's always hard to always con exactly what happens in a specific quarter, basically. But we were confident that our market position, we've very confident about market position. I'm very confident that at the market on our growth or our continuing our growth agenda with a strong, organic growth and that's truly how we see that operationally right and we are very happy to see the very strong market that we're in. It's a market is really turning where enterprises are increasingly wanting to talk to us, not only about their messaging needs, not only about the email needs, but they want to talk about -- talk to us about how we engage with customers, how to reduce their churn and how to reduce the customer care costs.
So we're getting in a much more strategically tested discussions with a lot of the enterprises and that's I think it's a very, very interesting trend going forward of also supplying, becoming more strategic partner. We're also supplying a lot more software and SaaS services on top of the high volume, transactional moments.
Thanks a lot for your interest on I'll leave you back to Thomas.
Thank you very much, Oscar. Thank you, Roshan and operator, may we have the first question please.
[Operator instructions] Your first question comes from the line of [indiscernible] of Carnegie. Your line is now open.
Thank you, operator. Thank you for taking my questions. This is on the pricing dynamics. So, from a competitive standpoint dimension in the report, it's a fierce smart markets, but we're happy to hear more comments on that, but we know this is a scale game of course. We know Sinch had its highest scale when it comes to messages terminated. We know their US peers that started off high gross margin feels unlikely that they want to combat you on core customers with lower prices and there's lower or certain European players, which are quite insignificant compared to in size.
So, wondering on the pricing side, are you proactive towards three key accounts or what is it about, or is there something happening you on the price side? So really reasoning on why you offer this to your key accounts?
I think it's a very natural thing. When accounts grow as much as they do, the ones you are the biggest brands in the world, you offer it. Sometimes I have tripled my volumes over the last three years, or I have doubled my volume. But then you start to go, can I get a better price? And I think that's prudent to do so.
It's not so that the gross profit, this is shrinking, but when you buy a scale at this volume, then I think that it's a very natural thing right. Of course we also see, these accounts, it's the biggest balance in the world. It's not like any of the competitors don't know about them, so at all times, our competitors are always trying to get into them right. That's how it is. And then we try to be proactive, but not afraid, but also knowing our quality and evaluating our quality right. But we also, at some points, it's very practice. We can, you know, w we can only react. So we're also proactive and taking the, the, taking the steps that we think is to get through the reasonable and balanced price model, the price level.
All right. Thank you. And one on operator costs and the pre-buying of trap traffic and the working capital impact in, in you doing this and the pre-buying, does that imply that you expect more hikes going forward? Or what do you think on the carrier side for the coming quarters
I think firstly, what we have to say is, I mean, we have a wide operator network, right? I mean, we, I think at last count we had more than 450 operators that we are directly connected with. Now we're talking about a few selected ones where we have the opportunity to various technical and financial solutions, get better tones. And then we, we use our size and our position to actually obtain that this is by, for not yet a widespread phenomenon and I think it's difficult to draw from these individual deals, any kind of broad trends on operator, price changes, across all of our, across all of our connectivity kind of portfolio.
All right. And just one final question long-term…
We will keep you -- we'll have to go back to the end of the queue. We have a lot of participants, operator.
Thank you. [Operator instructions] Your next question comes from the line of Daniel Thorson of AVG. Your line is now open.
Yes. Thank you very much. I have a question regarding SBI. It seems like they have been growing sales slightly over the one and a half years since you acquired it while declined around 8% on gross profit. Can we get the feeling for the current organic gross profit run rate in SDI as it will have a dilutive effect on organic growth in the coming quarters?
Yeah, I think you have to make a brief comment. I mean, you know, in a way continuing what they've said what we said previously if you look at the STI business we report you know, we've, we've reported that in three segments, we have the eight to key messaging reported as part of the messaging segments. We have the operator, interconnect people, the business report to the part of the operator segment, and then we have the compact tender business reported in the other segment from a current trends perspective. You know, what you can see in Q3.
And it is literally about a little bit of that in Q2 with that, we have a good development on the operator interconnect side. I mean, that, that business is developing to our satisfaction and, and you know, I think we still time to see if, if that is a long-term trend you know, and, and we're obviously working to make that a long-term trend on the ATP messaging side.
We said that business grows around 10% ish when we announced the transaction. What happened between signing and closing is that the growth actually declined in the B2B messaging side. And without speculating may have to do with, the lack of attention during that period from the SAP group, from this business, et cetera and what our focus has been is to get that trend and really, what we can see in terms of the underlying customer communications and, and discussions that we are having with the customers is that there is no reason for us to believe that it should not grow at the same rate as our organic growth. You know, but it's going to take us a bit of time right now, I would say, you know, that it is still weak compared to what we said at the time of famine.
And I think that that's sort of where it is currently Oscar. Yeah, I think it's weak, but including rights, we see good friends, we're doing the things we are doing. And we see, we see that traction taking effect and the things are very concrete. It's like, okay, SDI, didn't have a new sales people. If you don't have any new sales people on your base, you're not going to grow as much right. And they didn't work as much on the account management side. They didn't have any significant marketing standards. It's a very concrete thing to improve in all the areas we implement them. We see the effect, but it's not that full scale yet. So…
Thank you. Your next question comes from the line of Fredrik Stenkil of Nordea. Your line is now open.
Hi, good afternoon. So back to the question about sort of carrier fees and price pressure, just if we think about the organic sales growth for messaging was 35% then gross profit was 19%. That discrepancy though, is that could you comment them anything about the split sort of between the higher carrier fizz and how much is sort of GDP value capture that goes from you to the customer? If you understand my question.
Yeah. Thomas here, I think, you're trying to break down the, the discrepancy between the growth rates of organic revenue and organic gross profit, where we've said the larger part is carrier pass through fees, which, you know, we'll analyze after four quarters and, and, and sort of drive up revenue growth during that time without really affecting cross profit. Right. then you have a not gonna take that, you might not be able to every single point in time to pop that cost on every customer immediately, at which point you will actually see detriment to gross profit, right.
Even if the largest part is more a dilution of margin than, than impacting gross profit. Then the, the second big aspect, of course as you alluded to is where we renegotiate that our volume band pricing for incremental traffic on larger customers that the carrier prosperity is the Nordic part it's. But, but the other one is, is a key factor too, unless of course, you know, bring some optimism as you analyze that in the beginning of 2022.
Thank you. Your next question comes from the line of [indiscernible]. Your line is now open.
Yes. Shall I first just follow up on the previous question the volume discounts I mean that, this, I guess so regular part of the business, but there start sort of something that you do on an annual basis with these customers, or do they happen once, once in a while when you benefit from the larger volumes you're seeing now driven by these volume discounts for a period. And then just a question on the cash flow impact from the prepaid mobile operator traffic tariffs, is this expected to bounce back as used volumes on these contracts and are you actually taking any risk relating to volumes?
Right? So we start off with the price negotiation. There is not a particular cycle, but when you work with some of the world's largest companies, you have a continuous dialogue and reassess, right? So there is no particular time timeline. I think why you're seeing this perhaps a bit more pronounced in Q3 and Q4 is to recognize where we were 12 months ago, where we were quite open that the majority of our growth in absolute terms were generated by a subset of our customers, our very largest customers right.
We also said, in the beginning of this year, and we said throughout this year that we're increasing green and broader-based growth. Now, when you look at the comparables and you must have the impact we are on here recognizing that, you know, a large part, an outside part of the growth contribution came from these customers one year back and it's exactly those customers where we have sorts of, you know, some new pricing, right. That's why, you get the little bit of a pronounced effect in Q3 and Q4, of course, as we broaden our growth, you know, that type of concentration decreases. Right.
And we already see that. So, it's a little bit special with this one or two quarters based on the concentration we had one year back, but the, both on the organic side that's changing and, and even more so with the fire agenda of course there's a greater breadth of the business then on the other question yeah, I can try to answer that. Obviously when we do these transactions we have a number of risks, obviously that we tried to mitigate and manage.
We have obviously clauses in the contract that, that, you know, they could protect us, for example, in certain types of forced mature situations or in a tech shift situation, etc. We also I think in the case of these contracts often and I think in at least talking about the transactions for this quarter, in all of these cases actually put in a software solutions in terms of a firewall at the operator that makes sure that we can secure that all of the traffic is and ending up with us and that there are no ways around it, but at the end of the day, yes, there is a certain volume commitment that we make. And here we rely on our long expertise.
Many of these are repeating customers with us also. So we have a good insight into the history of the traffic. But there is an underlying for those volumes risk that is inherent in these kind of transactions.
Yeah, there is but also that we think, obviously making this transaction, we think the risk is very manageable, right? And they're just, there's a need by the, our longest standing experts being 20 or 25 year message that messaging going to veterans, having seen there's many, many times, right.
So we think the risk is very manageable. But yes, there are risks, construction types of deals. This is one of them. What we think is very manageable.
And then relating to the cash flow impact, should we see this coming back the volume?
Yeah. I missed the answer on that. That can vary a little bit depending on the clauses, in the specific contracts, it does come back over the lifetime of the contract, whether it comes down, evenly over the lifetime of the contract, sometimes in the -- in towards more tilted towards the beginning, and sometimes more tilted towards the end. That is really an individual contract decision. But yes, it comes back over the lifetime of the contract.
Thank you. Your next question comes from the line of Daniel Djurberg of Handelsbanken. Your line is now open.
Thank you, operator. Yes. Two questions might touch upon this, but again, not the volume discounts is this only part of the big tech companies or only a few of them, and also impacting the full quarter was just part of the value increasing in Q4 or increasing so to say and also to comment on how large part of the Mexican revenue that came from this in Q3 versus one year back. Thank you.
Thank you, Daniel. We've got a very poor line, but I believe you asked about, how many of the of our larger customers we're renegotiating prices with Oscar. So that was the first subset of an off customers. This is not the regular developed at this is we have a regular weekly daily meetings with these customers, right. It's got a very large customers and very large buyers. No, it's not all opposite. But it's -- and it's not regular, right. It's very obvious. The second and the, the coming two questions you had was for…
Part of the Mexican revenue that came out from the big tech in the quarter.
Yeah. We haven't disclosed that figure.
Okay. May I ask you about Sweden? It was not your focus markets quite look down year-over-year, especially in messaging and it's directionally with more or less market share or anything else that we should be aware of.
Daniel, I can take that one. We have customers that have invoicing addresses in different countries and we essentially based that information on the customer's invoicing and breasts, and really what has happened in that specific case is that we have large customers that are moved in invoicing addresses, which means that revenue has moved you know between sort of jurisdiction in that 14 and that can happen sometimes time in that.
Thank you. Your next question comes from the line of Anders Johansen from Danske Bank. Your line is now open.
Yes. Good afternoon. Just curious about the sort of a scale capturing investments for how long will they last, and then secondly, what about M&A ahead, and how do you see that in terms of size and perhaps timing also with regards to the integration work that you do now?
I can maybe start just with a brief comment on the first question, and then I'll hand over to Oscar to elaborate further and answer the M&A question. I think what we said what we had said previously is that we see that the ramp up that we've seen in previous quarters of the cost will decelerate. And I think that we're happy to see in the, in the Q3 numbers that that's the case. Then I think, when you look at these scale investments, some of the investments that we're making, it's just needed by the fast growth of the business, right?
We've gone from 800 people to more than 3,500 people and the ERP that we chose to operate the business on when we were 800 may not be the ERP that we choose to operate the business on when we were 4,000 people. So I think we have to look at these decisions in the context of where we are at every point in time. But that being said, Oscar?
Yeah. So yeah, we're taking them now and then scaling them off us. We have asked, we bring in these companies, right. And we do think we take a little bit too much cost now, to be honest. But we just have to handle the extreme growth. Right. Then we see that, okay, we're not efficient in all functions. We need to overstock a little bit. We need to bring in consultants, et cetera, because it goes, go so fast.
And there are plenty of opportunities to optimize that going forward, but what we just need to handle the growth. And right now it's more important to close these transactions then to optimize growth in these two quarters right. Yeah. So that's very clear. And long-term again, we plan to grow OpEx in line with GP. There's no questions all right.
On your second question, how do we see the opportunities for further M&A? Q4 is obviously a very busy quarter. I would say. We may not close $4 or $3 and one small transactions every quarter, or we will not, but we do see, and obviously we need to time all M&A to our ability to integrate and ability to handle it very, very clearly. And we're very cautious and conscious about that.
But a little bit more on long-term, we do see a continued consultation. We do see a very attractive pipe of incoming M&A opportunities going forward. There is no change in our M&A strategy going forward. We will for the coming quarters and years you know, we project to continue to grow organically and via M&A during this very intense constellation phase of this market. And I think that's very beneficial to us as company, our customers and our shareholders going forward as well.
Perfect. Thank you.
Operator, do we have a final question?
Yes, sir. It's from the line of [indiscernible] of SEB. Your line is now open.
Yeah. Thank you, operator. Just a bunch of follow-ups I guess, but looking at the gross margin, I guess, everything you're seeing everything you're seeing points to Q three being the trough is, is, and I guess sort of us messaging revenues Q3 was actually lower than Q2, which is the first time we see a sequential decrease since 2019.
You're seeing that you're seeing a broad-based growth, etcetera, etcetera. And then if you remove as these acquisitions coming in with structurally higher gross margins, is there anything that sort of points to Q4 being in line with Q3 or even worst off and gross margin wise?
I can try to start off there. I think as we said Remy lemon on the, on the gross margin front, we have, we have a number of different effects. So many, if you look at the, the mix effect obviously placed in, and that's, that's a bit difficult for us to specifically kind of give any commentary around that can vary a lot from quarter to quarter on the operator price increases.
What we, essentially see is that you, you have where we have bundled customer offering, including the operator price and our gross profit, it does take a bit of time for us to analyze that customer by customer and, and, you know, work with customer pricing to, to increase you know, margin.
So, that is something that is, you know, not just a one quarter effect, but can take a couple of quarters, three quarters to kind of work that back up again. And, and again, on the volume discounts, what we've said, that's at least a four quarter effect, right. In terms of when it starts to, it starts to play back now that being said, Q4 is also, a seasonally strong quarter has been historically, I think it will be interesting to see with all the news flows around, component shortfalls and delivery challenges around the world. How we see our volumes play out during Q4 here, but there is definitely a seasonal effect during Q4, which will, which will play positively for us.
Okay. Okay. Just a clarification, these price sites from operators that was two quarters ago, someone completely mistaken, or at least in Q2, how have you started to push them out to which customers?
Yes, we have. But there have been continued price increases over mouth before start with one, and then the other operators, follow, right. So it's been continued in the market, right? The one opera does it and the others feel they can do it as well. So, it's continued and then I'll say longer than we expect them to continue longer than, than the first time the report rates.
And then we reported the GAAP right and then we have started again, I was doing price increases on the first ones, but then, then obviously on the other ones. Right. but actively working on that this is not a new phenomenon as such, right. It's just that occasionally it gets a little bit lumpy, so we don't want to exaggerate any, any trends. This, this is, you know, relatively business as usual from our point.
Yeah. And I think we had like 700 price sensors from operators in the, in the first part of the year or something. So this happens all the time to support our business has happened every year, but sometimes it's say individual quarters, right. But the guy, this is not nothing new, it's hitting individual quarters, but to get back to your questions, it's, there's no change in the underlying structural growth or this industry.
We see no reason and no impairment. So we're, you know, we continue to drive for the same growth levels that we have seen that we have seen historically, and then trying it grows. And so there's no underlying change in that round, but the things hit individually quarters a little bit differently, but that's kind of, I think the underlying bottom line and reduce it to clumps in the market. And then on the positive side, increased customer demand for lots of new things and, you know, extremely active market.
And we also saw increased competition. Right. And I think these two are evening out a little bit, right. It's a tough market, but it's a very, very high growth and very, very attractive market on the other hand right. So, no underlying change in underlying predictions or from our perspective or what we've believe in Q4 growth rate.
And I think round that off, things, your question was really quite near kind focus. You've got to separate out the near term, the second happening with comparable in Q3 and even tougher in Q4 the impact of SDI coming in the price changes that we pushed through to some larger customers, which were in the beginning of 2022, and we'll have an effect also on Q4. And all of these things have, intermittent impact on the second half of this year.
Whereas, when you, when you take a slightly longer view, recognize there were closing for the important transactions during Q4, which will transform our P&L and we will multiple mixed effects, including higher gross margin, a higher adjusted EBITDA. Starting already from Q4, we will begin to see those mixed effects. And as we go into next year and again, rephrasing what Oscar said, we're starting to see the multi-year initiative in broader growth pay off, right. We're not getting that data in Q3 and Q4, but a little bit of a rough patch this type of quarter, it doesn't change our fundamental view of the market we operate in.
Okay. That's clear. A final one if I may, just on the ATP monitor station deal here. I mean, last presentation, I think you spoke about the turnkey customer engagement market going by above was it 25%, these types of deals, should they incrementally add to your ability to take market shares? Or is this you being defensive for lack of a better word?
No, this is a drunk driver. Very clear. We wouldn't make these types of deals if you don't see a very good business opportunity, right? You don't spend this amount of cash, if you don't see a really good deal. So, this is a growth driver in short which we're saying, all right, great, this we make because we can increase growth.
Thank you. That'll have to be our last question. Thank you very much. Thank you all for your interest.
Thank you very much. And that does conclude our conference for today. Thank you for participating. You may all disconnect.
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