Link Mobility Group Holding ASA

OSE:LINK

Earnings Call Transcript 2024-Q1

[Tom Rogn, executive]

Good morning, and welcome to the First Quarter 2024 Results Presentation for LINK Mobility. I'm Tom Rogn, Investor Relations; and joined by Thomas Berge, CEO; and Morten Edvardsen, CFO, who will present the results. Following the presentation, there will be a Q&A session. Please post questions online during the presentation and Q&A.

Thomas?

[Thomas Berge, executive]

Thank you, Tom. The first quarter of 2024 started out strong with a continued high growth momentum and most KPIs in the high end of expectations.

LINK is the leading and largest CPaaS player in Europe. We started out more than 20 years ago in the Nordics and has been part of building the messaging market in the Nordics to one of the most advanced messaging markets in the world. LINK is using this experience to fuel the development in the less-penetrated markets in Europe.

Our strategy is dedicated to providing digital communication products to the enterprise market for them to interact with their end customers. We approach the enterprise market through a strategy of local touch points with our clients. We have numerous sales representatives, customer service and customer success employees on the ground, winning new contracts and supporting existing clients in local language and culture.

This setup is creating a larger reach than many of our competitors who have a more regional or centralized approach to the market. LINK's more than 50,000 clients serviced by our 29 offices in 17 countries are a result of the successful implementation of this strategy over many years.

Group revenue during the last 12 months was recorded at NOK 6.6 billion. LINK has grown significantly over the last years with a revenue CAGR of 21%. Profitability has always been a key priority. LINK is growing the business while generating profitability and net positive operating cash flow. In the current quarter, adjusted EBITDA is reported at NOK 641 million on an LTM basis, which is up from NOK 613 million reported end of last year or a growth of almost NOK 30 million in just 1 quarter.

LINK's business model is sticky, scalable, diversified and growing with a local commercial approach, focusing on customized communication needs for enterprises to interact with the end users. The business model is, in our view, exceptional in the industry and very difficult to copy or replicate. LINK has spent more than a decade building up a strong local presence, winning and operating thousands of enterprise clients with bespoke solutions, enabling a unique communication preference for clients.

LINK has a sticky customer relation documented by revenue churn below 2% and a recurring business model with an underlying historical net retention rate of approximately 110%, as shown in the top-left graph. The uniqueness in the customer relations is a direct result of LINK's local representatives always being available to provide personalized support in local languages and build meaningful relations.

LINK is operating in a growing industry, as seen by the differences in the penetration rates in mature and less mature markets, on top of the additional demand for more advanced CPaaS products. The company has significantly increased sales on new contracts for more advanced products over the last quarters. This growth translates into improved profitability as the scalable business model enable a larger new volume and revenue to be onboarded with only limited OpEx increases.

LINK's local business model provides versatile and diversified revenue streams from the many products, customers, industries and markets where we operate, giving a solid foundation for future growth.

The first quarter was also a very good quarter with organic growth momentum in the high end of our expectations and when compared to industry peers. Revenue is reported at almost NOK 1.7 billion or an organic growth of 20% in fixed currency.

Western Europe experienced yet again an impressive quarter with a revenue growth of 22% in fixed currency, driven by implementation of won contract previous quarters, strong growth momentum on existing customers as well as higher demand for the more profitable OTT channels.

Central Europe reported a revenue growth of 20% in fixed currency, fueled by high activity on both existing contracts and new customer wins. Global Messaging posts strong organic growth in the quarter at 39%.

Gross profit is reported at NOK 356 million or an organic growth of 11% in fixed currency. Profitability was positively impacted by high growth on the more profitable OTT channels like RCS versus SMS and e-mail. The OTT channels and especially RCS experienced high market demand in Q1 as in the last half of previous years.

Adjusted EBITDA is reported at NOK 158 million or an organic growth of 17% in fixed currency, higher than gross profit growth due to LINK's scalable business model. OpEx in the current quarter is NOK 9 million higher due to larger-than-normal bad debt provisions in Global Messaging.

A large portion of the adjusted EBITDA was translated into free cash flow, which was reported at NOK 118 million for the quarter. Large cash reserves of NOK 3.4 billion reignited inorganic growth opportunities through M&A. LINK has a solid portfolio of M&A opportunities consisting of profitable and accretive targets, both within Europe and outside Europe.

Targets within Europe are the main priority, but we also have targets beyond Europe in the 11 actionable targets being prioritized. EBITDA potential deriving from the 11 prioritized targets is up to [ EUR 400 million ]. The company is saying up to EUR 40 million since we, of course, would not expect all of them to close.

The enterprise segment had a strong quarter with a NOK 32 million gross profit growth year-over-year. The enterprise segment reports an organic growth rate of 11% in fixed currency, driven by high activity levels across several sectors and increasing volumes driving from higher-margin OTT traffic like RCS. This trend was more significant in Western Europe compared to other regions and explains part of the high gross profit growth in Western Europe.

Global Messaging is more volatile compared to the enterprise region. In the current quarter, Global Messaging experienced a revenue growth of 39%. Gross profit growth was lower due to mix effects reported at 5% in fixed currency.

The graph at the bottom displays the margin impact from the segments. Margins declined in Q1, mainly due to the explained development for Global Messaging and customer mix effects in the enterprise regions. A larger portion of the growth comes from higher-volume clients with lower margins, which mitigates the higher profitability from the increased volumes on OTT channels. Underlying customer margins were stable.

LINK has significant improvements in new business wins over the last 2 years based on the renewed focus and changes in commercial execution initiated in 2022. The graph on the right shows the estimated annualized gross profit on new contracts signed since 2022. The numbers are extracted from our CRM system, and the estimations are based on contractual arrangements and specific dialogue with clients.

As the graph shows, gross profit from signed contracts has increased significantly since Q4 2022 and stabilized at a higher level in the mid NOK 30 million range. Internally in LINK, we have a target of achieving NOK 40 million plus in gross profit from new contracts per quarter, except Q3, which will be lower due to summer break. The current quarter was somewhat under this target with NOK 36 million in estimated gross profit from new contract win, however, with a doubling year-over-year for higher-margin solutions.

Isolating the new contract for advanced conversational products, namely CPaaS in the graph, the current quarter is all-time high with NOK 14 million on estimated gross profit. We observed more traction in market demand on advanced mobile marketing solutions combined with bots and WhatsApp, RCS. We also see more demand for marketing automation and CDP in the Nordics, which I will return to on a separate slide.

LINK signed 802 new contracts in the current quarter. Historically, about 75% of gross profit is recorded in the P&L after 12 months. We expect a higher contract backlog to benefit gross profit growth gradually during 2024. LINK has a healthy sales pipeline in addition to the new agreements won.

Revenue churn is consistently low for this quarter reported at 1.6%. Low churn is a result of more complex integration enabling customized communication from enterprises to the end users. This gives more value for our clients and higher transition cost and less incentives to switch vendor based on price preferences. Net retention in stable currencies reported at 114%, positively impacted by high revenue growth from the Global Messaging segment, but also a strong growth number for the enterprise clients.

LINK has several SaaS solutions that we offer commercially. The SaaS solutions are included in the CPaaS category when we report on new contracts won. MarketingPlatform is a software solution that we acquired in 2021, which we relaunched in the Nordics late 2023 after incorporating functionality and features requested by the market for us to scale the product commercially. MarketingPlatform is a marketing automation system, including a customer data platform, facilitating easily segmentation and omnichannel marketing activities.

We are seeing commercial traction and demand in the Nordics, quickly accelerating new business and a rapid increase in the sales pipeline. As we speak, MarketingPlatform is also being rolled out in the U.K. and other markets will follow. LINK is enable -- LINK is further enhancing its SaaS solution for MarketingPlatform with product road map, including AI content creation, to help our client to automate more of their campaign activity.

In addition to organic growth opportunities, the company is well positioned for inorganic growth through M&A. LINK has the competency, the historical track record for value creation through M&A and a solid pipeline with potential M&A target. Since 2015, LINK has closed over 30 acquisitions, of which the majority have been a great success, generating significant value creation.

LINK has a large M&A pipeline with profitable and high-quality targets. Bolt-ons in Europe have priority, but we're also looking outside Europe. Valuation on private companies in our space have been reduced since 2021 and '22, and we see a target valuation of between 6 to 9x cash EBITDA before synergies. The quality of the customer base, growth momentum of targets and synergy potentials are the main criteria, placing the valuation in the mentioned range of 6 to 9x cash EBITDA.

We have 11 prioritized targets, most of them are located in Europe. These prioritized targets have a revenue potential of up to EUR 250 million and an EBITDA target of up to EUR 40 million. We are using the term up to as we don't expect to close all of these 11 targets as some most likely will not go through due to various reasons. It takes time to finalize acquisitions. So the time line regarding these 11 opportunities varies, some are closer while others are further away in time.

The company is not publishing a detailed forward-looking statement, but rather pointing to LINK's stable historical performance and high cash generation. We expect LINK's European business to continue to display a high single-digit gross profit growth. Additionally, we expect adjusted EBITDA growth rate to be higher than the gross profit.

LINK has NOK 3.4 billion in cash reserves and a bond amounting to EUR 348 million outstanding after executed bond buybacks that need to be refinanced before the due date in December 2025. The cash position will be further strengthened by time as the company historically generates approximately NOK 40 million plus in free cash flow on a yearly basis. The high cash reserves will be used for acquisitions and a significant repayment of the existing bond.

Acquisitions will not increase net debt beyond a leverage ratio of between 2.0 to 2.5 to facilitate the lower-risk execution of the refinancing of the bond in 2025. The current leverage is reported at 1.1x adjusted EBITDA.

That was my part of the presentation. I'm handing the word over to Morten and the financial section.

[Morten Edvardsen, executive]

Thank you, Thomas, and good morning to everyone listening into the call. I will now go through the first quarter financials.

Before going to the results, I would make a couple of comments. The initial comment is in relation to the U.S. divestment. Following the divestment concluded earlier this year, all historical periods are fully restated in P&L and balance sheet, presenting all U.S.-related financials, including excess values held at group level as discontinued business or assets held for sale.

The second comment is a comment to change in segment reporting. Following an internal reorganization of geographical responsibility, the Netherlands have been shifted from Central Europe to Western Europe from first quarter 2024. All historical periods have been restated in the material reflecting this change.

Then to the first quarter results. LINK reports quarterly revenue of NOK 1.7 billion, a 25% reported growth year-on-year. Revenue growth in fixed currency was 20% or NOK 261 million with contribution of NOK 153 million from enterprise segments and NOK 108 million from the Global Messaging segment. Organic growth in enterprise segments and in the Global Messaging segment was 14% and 39%, respectively.

We observed market trends continuing into 2024 compared to a somewhat softer start to the same quarter last year, especially related to mobile marketing. In addition, we benefit from the continuous implementation of an increased backlog following the commercial refocus late 2022. As part of an internal optimization in regards to follow-up of global clients, selected clients, mainly reported under the Northern Europe segment previously, have been shifted to Central Europe, and this has a modest negative effect on growth rates in Northern Europe.

The Global Messaging segment continued to post good momentum growing 39% in stable currency both from regular aggregation traffic and on onetime password solutions. Total volume reported for the quarter was 4.6 billion messages or a year-on-year growth of 20%, in line with revenue growth in fixed currency. The slight decline in other messaging volumes year-over-year was related to a decline in legacy e-mail solution volumes not fully offset by the strong growth in OTT channels.

Moving over to the next slide on gross profit. Gross profit is reported at NOK 356 million or a reported growth of 15% with 4 percentage points positive impact from currency effects, resulting in a gross profit growth in fixed currency of 11%. We are very pleased to report a continued strong gross profit growth momentum in the enterprise segments at 11%, in line with the previous quarter.

As for top line, the quarter is supported by a healthy growth momentum in enterprise on both existing clients and contribution from new clients on the back of solid commercial results in terms of closed won contracts and increased adoption of new channels.

I would like to highlight again this quarter that Western Europe region has delivered growth in the high end of expectations, supported by strong volume growth and increased adoption of new channels compared with a somewhat softer period last year.

Gross profit growth contribution from the Global Messaging segment was NOK 1 million or a growth of 5% in stable currency as the margin was lower year-over-year, but relatively stable quarter-over-quarter. The lower graph illustrates the stability in gross margin level in the enterprise segment. In the quarter, we observed high growth momentum on larger low-margin clients with a negative effect on margin year-over-year, partly offset by a positive effect from growth on higher-margin channels.

And to adjusted EBITDA. Adjusted EBITDA is reported at NOK 158 million, a reported growth of 22% or 17% in stable currency. Growth is driven by NOK 33 million gross profit growth, well below the OpEx growth at NOK 11 million or 6% in stable currency. OpEx in the quarter was negatively impacted by a typical bad debt provision of NOK 9 million isolated to 2 aggregator clients in the Global Messaging segment, while 2023 cost initiatives still impacted OpEx year-over-year positively by NOK 4 million.

From the lower graph, we observed that adjusted EBITDA margin for the enterprise segment expanded year-over-year in stable currency by 0.5 percentage points to 15.7% as the slight reduction in gross margin was more than compensated for by lower OpEx to sales year-over-year.

Moving over to the P&L. In the previous slides, I have covered the development down to the adjusted EBITDA, hence I will focus on key items below. In the quarter, we report nonrecurring cost of NOK 19 million, consisting of share option cost of NOK 14 million, while restructuring and M&A costs were NOK 2 million and NOK 3 million, respectively.

The restructuring costs were down quarter-over-quarter linked to organizational changes executed during the previous quarter in Central Europe, while M&A costs were to a large degree related to finalization of the U.S. divestment. The share option cost for the quarter consists of quarterly costs related to the current programs of NOK 8 million and increase in social security cost accrual of NOK 6 million, whereof NOK 2 million catch-up from previous quarters, NOK 1 million normal run rate and the remaining linked to increase in share price since last quarter.

Cost of depreciation and amortization is reported at NOK 83 million from comparable level of NOK 77 million last year, excluding the U.S. from currency effects of NOK 3 million and finalization of development projects explaining the residual NOK 3 million.

Net financial items are reported at positive NOK 283 million and includes a net currency gain of NOK 228 million, whereof NOK 197 million is related to recognition of currency gains booked under other comprehensive income under equity through the ownership period of the U.S. entity, Message Broadcast. Net interest costs reported at NOK 17 million, which includes NOK 38 million in bond interest cost, NOK 4 million in amortized transaction costs, partly offset by net interest from cash deposits and interest income on own bonds held.

Interest income recognized in the quarter includes a negative NOK 3 million correction from previous periods. Hence, underlying interest income was NOK 28 million for the quarter. In the quarter, we have recognized the estimated gain on sale of the U.S. business amounting to NOK 73 million.

Then to the balance sheet. Noncurrent assets amount to NOK 7.1 billion, whereof NOK 4.5 billion in goodwill. Included in noncurrent assets are also the sellers credit and earn-out related to sale of Message Broadcast with NOK 108 million and NOK 292 million, respectively, and NOK 400 million in total. As due dates for settlements are in the second quarter 2025, these are considered long-term assets in the first quarter financials.

Cash reserves were reported at NOK 3.4 billion and expanding about NOK 2.4 billion year-on-year with the main contribution from the U.S. sale by NOK 2.2 billion received in the first quarter. During the quarter, LINK acquired own bonds totaling EUR 12.2 million equal to NOK 138 million, below par at an attractive yield compared to alternative placements. In addition, as part of the previously announced share buyback program, LINK acquired own shares for NOK 40 million equal to 2.2 million shares. The total frame of the buyback program is 17 million shares or NOK 400 million, ending 29th of May this year.

Reported receivables increased by NOK 266 million and payables increased by NOK 352 million year-over-year and was impacted by currency adjustments of NOK 35 million and NOK 25 million, respectively. The underlying increase was driven by organic growth as well as timing effects related to collection and payments.

Net interest-bearing debt is reported at NOK 699 million, calculated in accordance with our bond agreement, and gross debt related mainly to the one outstanding bond will be maturing in December 2025. Receivable sellers credit item of NOK 108 million related to the sale of Message Broadcast is not considered deductible for net debt calculation according to bond terms. The leverage was at 1.1x LTM adjusted EBITDA end of first quarter.

Turning to my final slide on key operation and cash flow items. Figures are excluding the U.S. historically, except for bond interest, which are included in full for historical periods, also reflecting the financing cost of the U.S. Our European business generates a high cash conversion from adjusted EBITDA through limited CapEx and a very attractive current financing structure.

Thus, 12-months cash flow after CapEx, bond interest and lease payments represent NOK 381 million or close to 60% of adjusted EBITDA, supported by a strong organic growth momentum. It should be mentioned that the last 12 months free cash flow of NOK 381 million presented here includes approximately NOK 50 million in interest paid related to the ownership of Message Broadcast.

Working capital released last 12 months of NOK 92 million impacted by timing of receivables and payables, and regular working capital is expected to normalize over time. Annualized bond interest run rate just below NOK 150 million to be offset by [ run rate ] interest income of NOK 28 million per quarter as recognized in the P&L. The high free cash flow generated from operations will further strengthen the strong cash position, providing ample financing capacity for LINK's disciplined M&A strategy.

Finally, I would like to reiterate LINK's financial policy of net debt not exceeding 2 to 2.5x adjusted EBITDA with the outstanding Eurobond to be refinanced when viewed appropriate.

That completes the financial section. Now back to Tom on Q&A.

[Tom Rogn, executive]

Thank you, Morten. We are getting ready to start the Q&A. Please post questions online.

[Tom Rogn, executive]

The first question is related to the bad debt provision, if you could give some color on that and if it's a one-off or is there some level to be expected going forward?

[Morten Edvardsen, executive]

Yes. I think for the quarter, we recognized the NOK 9 million related to Global Messaging. Typically, in Global Messaging, we're very [ strict ] when it comes to credit valuation of the clients. We also have a high degree of prepayments there. So this was basically a typical recognition. We don't expect this level going forward. Of course, by that, our evaluation of receivables is an ongoing practice that we do, and we follow up typical policies here for overdue debt, but we don't expect this high level going forward.

[Tom Rogn, executive]

Then a question related to AI, at least LINK's any potential efficiency gains and how AI is included in product development?

[Thomas Berge, executive]

Maybe I can take that one. Artificial intelligence, we are -- we have that in the product portfolio already. We have 2 AI solutions connected to our [ bulk ] products. We are also using AI internally. For example, within development, we use AI to code -- to share a code and such. And we're also seeing AI being demanded from the market on content creation. So that is why I mentioned also we are including that in the product pipeline for MarketingPlatform.

[Tom Rogn, executive]

Then there's a question regarding Message Broadcast, if there's any comments on who are the buyers of the company and how Message Broadcast currently is performing with reference to LINK's earn-out?

[Thomas Berge, executive]

Yes, we can be open on the [ acquired ] Message Broadcast now. They sent the press release a couple of weeks ago. It's a private equity company called OceanSound headquartered in New York, specializing on software solutions that is delivered to regulated verticals in the U.S. Message Broadcast is performing as expected. But of course, Q1 is normally sort of not the peak season; it's Q3 and Q4. So -- but as far as we know now, things are going according to plan.

[Tom Rogn, executive]

Then there are a few quick questions from Kristian Spetalen, Arctic. The first one is related to the quarterly contracts win. What would be the growth rate for LINK if the company is able to have NOK 40 million of new gross profit contributions coming in every quarter?

[Thomas Berge, executive]

Yes. Of course, that depends on how the existing customers are performing because they are the main chunk of the gross profit that we book each quarter. But in a normalized situation, then a NOK 40 million new contracts each quarter would take us to what we have stated is our target at a high single-digit gross profit growth. So that would position us in a good way to deliver on our targets.

[Tom Rogn, executive]

Then we have a specific question on Northern Europe and the growth there and if the lesser growth is due to higher prices from mobile operators or if there are any other reasons as well.

[Thomas Berge, executive]

No. Norway is the dominant market in Northern Europe, and the market has been a little bit more challenging in the last 12 to 18 months due to mobile operator price increases. Additionally, we see an Easter effect. The seasonality regarding Easter, it's the highest in the Nordics. So of course, having the Easter in March this year versus April last year also has a negative effect on the growth momentum. Exactly how much that is, it's impossible for us to tell.

[Tom Rogn, executive]

Then it's a question on the scalability of CPaaS products, if LINK needs to add any resources or if it will scale with the current resource base?

[Thomas Berge, executive]

Many of the CPaaS products will scale with the current resources, but MarketingPlatform is an example of a CPaaS product that we probably need to add a few resources. We're not talking about a lot, maybe 2, 3 salespeople per market, customer success people to scale the solution.

[Tom Rogn, executive]

The working capital was very strong in the quarter. Were they in the one-off effects? And did you see any headwinds due to Easter?

[Morten Edvardsen, executive]

Yes. I think basically, the LTM working capital is a little bit on the high side. Easter has some impact on timing as it -- so sort of capital was a little bit before the calendar month-end, that usually gives some effect both on receivables and payables. I expect there is no one-off effects in the working capital in the quarter as such. I would expect still this to normalize over time.

We also recognize received interest as part of other provisions. So that's also part of the working capital impacting NOK 16 million for the quarter. So that will, of course, contribute going forward more than it has historically due to the higher cash position. But we expect it to normalize from what I believe is on the high side LTM level right now.

[Tom Rogn, executive]

Then there's a question on the M&A pipeline and the implied EBITDA margin of 16%, if it's possible to give some color around that and what the target companies would look like compared to LINK?

[Thomas Berge, executive]

The 16% in EBITDA margins, it's within the interval that you would expect these targets to have. It depends a little bit, but normally 10%, 11% up to 18% is historically an EBITDA margin range that we have seen for acquired entities. The target companies, they are similar to LINK, but they are more pure A2P players. Their product portfolio is more limited to legacy products and doesn't have the same product portfolio that LINK has developed over the last 6 years, so yes.

[Tom Rogn, executive]

Then I have a few follow-ups and additional questions from Jesper Stugemo at Handelsbanken. Firstly, on the bad debt provision and the color on exactly how that played out in the Global Messaging segment.

[Morten Edvardsen, executive]

I think we can [ stop ] on this -- in the initial questions, it's basically linked to 2 specific clients. And there is no -- we don't expect sort of this level going forward. It's an atypical recognition of bad debt, which we see it prudent based on the aging of the debt.

[Tom Rogn, executive]

Then the other question regarding the new contracts of 802 contracts signed, which was slightly down year-over-year, what's this? And do you see there are certain hurdles in the market? Or what do you expect for the full year?

[Thomas Berge, executive]

No, we don't see any hurdles in the market to secure new contract wins. On the contrary, we see a market which has -- which is a little bit better than what we saw in 2023. The clients, they are more willing to -- or the market, they are more willing to spend money again compared to last year where more and more companies, they were doing cost savings.

Exactly how many contracts we are securing every quarter, that's going to vary a little bit with the customer mix. So for me, the most important thing is the NOK 40 million gross profit target deriving from the won contracts. That's sort of my main focus.

[Tom Rogn, executive]

Then some follow-up on the M&A pipeline, any color on the CPaaS content or potential target companies?

[Thomas Berge, executive]

All of the 11 targets that we are having in the prioritized pipeline are more pure A2P players. So we are acquiring market presence and customer stock, not necessarily technical solutions. The technical solutions are, of course, of high quality, which is one of the parameters in our battle plan for doing M&A because we need to secure high quality from the targets. Because when you focus on the enterprise market, price isn't the main churn driver, it's poor quality. But the solutions, they are very similar to what LINK is having on the legacy products and something we know very, very well.

[Tom Rogn, executive]

Then we have some questions regarding the bond maturity in 2025, if that, in any way, impacts the capacity to do add-on or bolt-on acquisitions? And if you could potentially be refinanced earlier than 2025?

[Thomas Berge, executive]

There's no limitations on doing bolt-on acquisitions because the maximum leverage target of 2.0 to 2.5 is -- compared to where we are now, we can use a high number of bolt-ons. So I don't see any limitations there. When we will do the refinancing of the bond, our plan is due to 2025. But of course, we are closely monitoring the market. And if we decide to do something sooner, we will make sure that the market is informed accordingly.

[Tom Rogn, executive]

Then we have a specific question on OpEx expectation for 2024, if that will increase in salary adjustments?

[Morten Edvardsen, executive]

Yes. And typically, we expect inflation as impacting our cost base as any other company. Basically, we stick to the outlook that we expect adjusted EBITDA to grow more than the growth rate on gross profit. So that gives an indication on what we expect. But the salary increases, of course, typically you see from low single digit to sort of about 10% in the different countries based on the geography basically and the local inflation. So we would probably expect that to be at sort of mid-single-digit area.

[Tom Rogn, executive]

And there's a follow-up on the potential of MarketingPlatform once it's rolled out to all countries.

[Thomas Berge, executive]

The potential is big because there's a large established need for marketing automation system. So if you sort of look at the amount of money that a certain market is spending on it, it's checking, I think. So there's a huge potential.

Of course, it's not realistic that we will go in and displace a significant portion of existing vendors there. But if we're able to get to 5%, 10% market share in the market, I would be super happy and then we would look at a very -- a P&L which would be fairly high, then we would be talking about sort of hundreds of millions in revenue and assess the potential. But that is not going to materialize sort of in the next year. This is something we gradually need to roll out and build market awareness and market share.

[Tom Rogn, executive]

Then some follow-ups on M&As and what's the success rate historically for how many you succeeded compared to the pipeline? And what are the main hurdles for not succeeding?

[Thomas Berge, executive]

The main hurdles when it comes to the 11 prioritized targets is it's basically sort of the quality. We use the due diligence to verify the quality of the asset. And if the quality is not designed than what the sellers have previously communicated to us, then that's, of course, sort of a problem and the main reason for why we would back away from a deal. When we have gotten to a certain stage in the dialogue, price expectations is a less risk, but of course, it is always present as well.

When it comes to specific hit rate, it's fairly high. But of course, the time line on it can differ quite a lot. Some targets we have used 2 years to close, other targets had closed quicker. So yes, I don't sort of -- I don't think it's going out with a certain percentage. It's -- that wouldn't be prudent of me to do that because we -- yes, we need to close the deal. And there are hurdles, of course, from getting to where we are now to getting a closed deal, but I'm very optimistic and positive on M&A in the next 24 months.

[Tom Rogn, executive]

There's related questions on the outlook for the future. Why LINK doesn't give a forward-looking statement and more refers to historical performance?

[Thomas Berge, executive]

The reason for this is that the debt situation is under control, and we don't see a need to give a detailed forward-looking statement for each fiscal year, as we did before. LINK is a stable company with a sticky and recurring customer base. So pointing to the historical growth momentum is something we sort of feel is a good way to communicate what sort of expectations external stakeholders should have to the company.

[Tom Rogn, executive]

Then we have a question regarding the financing of M&A. Are you planning to use only cash or other options as well?

[Thomas Berge, executive]

No, we are planning to use a common -- and most cash, of course, because of the cash situation in the company, but also sellers credit and earn-outs when it's appropriate will be used. We can also use shares, directly issuing shares to the sellers. But as of now, I think that will be something we would normally not want to do with the current share price and unless there's all the other heavy reasons to decide doing that.

[Tom Rogn, executive]

Then there were a couple of questions from Cantor -- from Vinay Bhardwaj from Cantor Fitzgerald. On the Western Europe business, could you expand on the growth drivers? And also the growth for EBITDA was significantly ahead of the gross profit. Can you also expand on that?

[Morten Edvardsen, executive]

Yes. As we touched upon in the corporate, it's very -- we see the performance in Western Europe being on the high end of expectations, which also considered that we saw a soft start to 2023 in Western Europe initially, especially to retail. So it's somewhat a soft start, so a little bit lower comparables. We are basically -- it's coming both from growth on existing clients and new clients, which we closed during last year.

In addition, on top, we see the good contribution from the growth on OTT channels. So it is -- that's the main drivers, I would say, for the year-on-year growth in Western Europe.

When it comes to the adjusted EBITDA, I think that's then driven by the good growth we have on gross profit and with the prudent OpEx increase, it's around 6%, which is then sort of driving a very good EBITDA growth year-on-year.

[Thomas Berge, executive]

And we have a very scalable business model. So when we have a good gross profit growth, a very large portion of that will hit adjusted EBITDA. So the EBITDA growth would be quicker than what we see on gross profit, which is something we also have in the forward-looking statements.

[Tom Rogn, executive]

We currently have no further questions. Please post any additional questions. As there are no further questions, we thank all participants and conclude the Q&A.