Release Date: July 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sinch AB (CLCMF, Financial) achieved an all-time high cash generation level, with over SEK1 billion in operating cash flow in Q2.
- The company repaid SEK881 million of debt in Q2 and SEK3.1 billion over the last 12 months, reducing the net debt to adjusted EBITDA ratio to 1.7 times.
- Gross margin continues to increase due to higher-margin products growing faster, improving the overall mix.
- The APAC region recorded a strong quarter with net sales up 7% organically and gross profit growth at 19%.
- Sinch AB (CLCMF) has made significant progress in its growth acceleration plan, realizing gross savings of SEK58 million in Q2, corresponding to SEK232 million on a full-year basis.
Negative Points
- The company recorded a slight organic revenue decline in the quarter, with gross profit growing only 2% on an organic basis.
- EMEA region recorded a 4% decline in gross profit on an organic basis compared to Q2 2023.
- The network connectivity product category in the Americas region experienced a decline due to reduced voice traffic and the impact of the 8YY toll-free reform.
- Operating expenses remain flat over the previous quarter due to sustained investment into transformation programs and inflation offsetting realized savings.
- The EBITDA margin is stable at 11%, which is lower than the company's longer-term aspirations.
Q & A Highlights
Q: You mentioned in the press release that you're expecting growth over the coming quarters to stay in the low single-digit range. Can you comment on any factors affecting Q3 and Q4 growth?
A: (Laurinda Pang, CEO) There are definitely puts and takes. We have some tailwinds with regards to the AYY reform starting to diminish its impact. However, we had strong comps in Q3 and Q4 last year. The market is somewhat slow right now, and we don't expect dramatic changes in the near term. It's not about our execution but more about market trends.
Q: Can you provide more details on the strong performance in the APAC region and its drivers?
A: (Laurinda Pang, CEO) APAC had a very strong quarter with gross profit expanding by 19% year-over-year. This was driven by continued strength from India and our message media businesses. (Roshan Saldanha, CFO) The revenue growth was 7%, and we should continue to see good performance, although not necessarily as high as this quarter due to a weaker comparison quarter last year.
Q: Are there any meaningful differences in growth rates between large enterprises and SMBs across regions?
A: (Laurinda Pang, CEO) SMBs and mid-markets are still growing faster than large enterprises. (Roshan Saldanha, CFO) Large customers have been more cost-conscious, impacting growth, while SMBs, which are heavier users of our applications product category, have shown more resilience.
Q: Are you seeing any early positive signs from your cross-selling efforts?
A: (Laurinda Pang, CEO) We are seeing early signs of behavior shifts and pipeline growth in cross-selling. Our sales teams are now equipped to sell multiple products, and we are seeing good leading indicators from pipeline creation and priority accounts.
Q: How should we think about the cost development over the next quarters?
A: (Roshan Saldanha, CFO) We have a cost reduction program aiming for an annual run rate of SEK300 million in savings by the end of the year. We have already achieved SEK230 million. Investments in our transformation program are coming ahead of the cost savings, and there will be a timing change related to annual merit cycles in Q3.
Q: Can you discuss the dynamics in the U.S. network connectivity market?
A: (Laurinda Pang, CEO) The U.S. network connectivity market is dealing with legacy infrastructure. We are converting from TDM to IP to stabilize costs. We have strong relationships with U.S. carriers and are managing this business for cash. The competitive landscape is stable, with all players facing similar challenges.
Q: What opportunities do you see from WhatsApp's recent announcement in India?
A: (Thomas Heath, CSO) WhatsApp is a popular channel in India, and changes in their pricing model present opportunities. The optionality between WhatsApp and RCS is positive for consumers and the ecosystem. We see strong potential in leveraging these channels for authentication and utility-based applications.
Q: How should we think about the ramp-up of RCS with the upcoming iOS 18 release?
A: (Thomas Heath, CSO) The iOS 18 release will improve handset support for RCS. Carrier support and pricing are also important factors. Basic RCS messaging is priced similarly to SMS, and more advanced use cases will develop over time. We expect straightforward use cases to lead the adoption, followed by more complex applications.
Q: Are you happy with your organic growth performance this quarter, and is it representative of future quarters?
A: (Laurinda Pang, CEO) While we grew 2% organically, it does not meet our longer-term aspirations. The market is slower, and we expect similar growth rates in the coming quarters.
Q: Can you provide more details on the headcount changes and their impact on functional areas?
A: (Laurinda Pang, CEO) We are simplifying and eliminating duplication, but investments in IT and back-office systems are necessary. We expect to see benefits in 2025 and beyond, with additional efficiencies and savings in outer periods. We aim to expand margins and accelerate gross profit growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
