Link Mobility Group Holding ASA

OSE:LINK

Earnings Call Transcript 2022-Q2

[Tom Rogn, executive]

Good morning, and welcome to the second quarter results presentation for LINK Mobility. I'm Tom Rogn, Head of Investor Relations. I'm joined by Thomas Berge, Interim CEO; and Morten Edvardsen Interim CFO, and who will present the results.

Following the presentation, there will be a Q&A session. To ask questions directly, please see dial-in details in the stock exchange release. It is also possible to post questions online during the presentation and Q&A. Thomas?

[Thomas Berge, executive]

Thank you, Tom, and welcome to LINK second quarter presentation. I will start this presentation with some high-level comments on the Q2 numbers as well as a short business review before handing the word over to Morten for a detailed presentation of the second quarter financials.

LINK is the leading and largest CPaaS player in Europe and has also established a presence in the U.S. through last year's acquisition of Message Broadcast. Our strategy is dedicated to providing digital communication products to the enterprise market, so they can interact with their end customers. We attacked the Enterprise market through a strategy of local approach and local touch points with clients. LINK's for 8,000 clients serviced by our 30 offices in 19 countries are a result of successful implementation of this strategy over many years. We want to build high-value solutions for our Enterprise clients. That results in long-lasting and sticky customer relationships with value-added upselling opportunities for future years.

LINK is continuously investing in its product portfolio to adapt and cater to future demand within our space. We have a well-positioned product portfolio ahead of current market adoption that matches or surpasses our competitors.

Group revenue during the last 12 months was recorded at almost NOK 4.8 billion. Profitability has always been important for LINK with a strategy to grow the business organically while generating profitability and net positive cash flow. Adjusted EBITDA on an LTM basis was NOK 603 million in the current quarter. Adjusted EBITDA for the current quarter was soft due to increased macro uncertainty negatively impacting revenue on mobile marketing volumes and higher OpEx related to commercial investments. LINK will now reduce costs to ensure that CapEx is aligned with gross profit growth, and we are recalibrating commercial resources towards executing on near-term growth opportunities.

We observed tougher market conditions for selected use cases and industries in a more difficult or uncertain macroeconomic environment. Mobile marketing is the use case in our portfolio that has the highest variation in volumes contingent on conditions in the macro economy. The other use cases are less impacted by a macro environment as volumes are triggered by normal interactions between our clients and their end users. We see sustained growth momentum for notification messages and new growth opportunities within customer care solutions.

LINK is well positioned for continued growth in the current environment, albeit at a lower level due to our large diversified customer base and competitive product offering. LINK is securing future business by signing almost 600 new contracts in the current quarter. Revenue churn is stable at around 1%, both factors providing a promising foundation for future growth momentum.

Counteracting the growth momentum is a softer development for mobile marketing volumes. In the second quarter, selected retail clients, mainly in Central and Western Europe are scaling down their campaign activity level as a response to lower consumer confidence, resulting in lower revenue deriving from mobile marketing. This trend negatively impacts LINK's overall growth momentum as a reduction in mobile marketing volumes partly offset the growth from other use cases. The exposure of mobile marketing volumes for LINK is mitigated by the fact that this use case constitutes a smaller portion of LINK's revenue base compared to other use cases.

We do not observe any structural changes in the market, explaining the soft development on mobile marketing volumes, except the macro environment and lower consumer confidence. A strong momentum on new contracts and low churn makes it reasonable to expect a rebound in growth levels when the retail sector recovers following an improvement in consumer confidence.

There are several growth opportunities that LINK can capitalize on, improving the growth momentum in the medium term. The market demand for mature products and selected CPaaS solution continues while advanced CPaaS products with low market adoption requires more efforts to sign and implement.

During the recent quarters, an increasing number of new contracts have derived for more advanced and less mature CPaaS products, and we have experienced longer lead times for scaling revenue on these contracts. The slower revenue contribution from the new CPaaS agreements have negatively impacted current growth rate and the revenue has not hit our P&L with the same speed as expected.

For mature products with proven market demand, we observed normal lead times for implementing and generating revenue resulting in 75% of expected revenue to be recorded in the P&L within 12 months of signing. Given these lead time variations, we have adjusted how we divert our commercial resources. We still see a lot of value creation from more advanced CPaaS products. However, we need to better balance our sales resources towards mature and selected CPaaS products with proven market demand to build stronger growth momentum also in the near term. LINK will align commercial investments with underlying market demand to avoid overinvesting too far ahead of market adoption.

LINK is now implementing OpEx and CapEx savings at the same time as we are recalibrating commercial resources towards near-term growth opportunities. Product development is already well ahead of market penetration enabling CapEx savings, which will not reduce the potential for future growth. On the OpEx side, LINK has made significant go-to-market investments since H2 2020. The increased OpEx will be reduced and the line with gross profit growth, resulting in higher profits next quarters. Pursuing commercial opportunities that exist in the market will be executed on with full force even if OpEx is reduced to avoid commercial overinvestments. There is also a clear potential for improving cash generation through ongoing integration of the several acquisitions closed last year.

Over to the main highlights for the second quarter reporting. Revenues reported at almost NOK 1.2 billion or a 12% growth, including M&A. Organic growth for the second quarter is 4% reduced by high comparables same quarter last year caused by the pandemic. Excluding the effect from high comparables, the underlying organic revenue growth rate is 11%.

In the quarter, revenue development has been hampered by a challenging macroeconomic environment, causing certain existing clients in the retail sector to stabilize or reduce their spend on mobile marketing messages.

Gross margin is reported at NOK 317 million or 18% growth, including M&A. Organic gross profit growth follows the same trend as observed for revenue with a smaller negative customer mix effect on gross profit margins. A higher portion of revenue growth comes from high-volume, lower-margin clients compared to the blended average.

OpEx has increased by NOK 10 million compared to same period last year because of historical go-to-market investments. On top of that, OpEx in the current quarter expanded due to a provision for a surtax claim and uncommon telco tax originating in France of NOK 4 million related to the fiscal year of 2019. LINK disputes the claim, but have booked an accrual due to prudency. The additional OpEx in the current quarter contributed to an organic adjusted EBITDA decrease and is reported at NOK 129 million or NOK 133 million, excluding the tax claim from 2019.

As I have said previously, the company is implementing cost reductions, which will be visible in the P&L in coming quarters and will improve EBITDA development. Strong cash generation in the second quarter with a cash flow from operations of more than NOK 200 million free cash flow at NOK 99 million after deducting CapEx and by annual interest payments of NOK 69 million. LINK continues to generate significant excess cash.

LINK has decided to revise the forward-looking statement to an organic revenue growth of between 8% to 12% for the full year 2022 to facilitate for the increased macroeconomic uncertainty and lower-than-expected growth in the first half of the year. We are aligning the cost base towards expected gross profit growth by implementing material cost savings on both OpEx and CapEx. The additional go-to-market costs, which have been built up the last 2 years will be offset with the planned OpEx reductions. These cost savings are designed and executed to have as little impact as possible on the growth momentum while increasing profitability shorter. On top of OpEx savings, actions are being implemented to bring down the current CapEx level. We have a clear plan. Further details on the execution and progress of cost reductions will be provided at our third quarter reporting in November.

LINK is delivering on new agreements, which will secure future growth. As you can see from the graph on the slide, in the current quarter, LINK delivered a 17% growth on the expected value of gross profit on sign agreements compared to the same quarter of last year. New contracts on more traditional A2P products are growing nicely with a 13% growth on estimated gross profit contribution year-over-year. Contracts will be implemented gradually and the historical data indicates 75% of gross profit will be recorded in the P&L after the first 12 months for market-ready products.

New contracts for CPaaS products are displaying a 57% growth rate compared to same period last year on estimated gross profit contribution. As mentioned previously, for these advanced products, we observed longer lead times to scale and generate the estimated gross profit. However, license revenue are being booked. So the potential from these contracts will partially be hitting the P&L as contracts are signed.

In the quarter, LINK gained further traction on customer service related use cases. Axiom, the largest provider of health care solutions in the U.K. is using chatbots to streamline its application process and to facilitate for patient interactions with the national health service. In Finland, a mutual insurance company, Turva is implying digital messaging through WhatsApp and SMS for proactive customer support. And across the Atlantic, LINK is working with a global logistics company to integrate 1,000 customer support workers with chatbot through WhatsApp communication.

LINK's own chatbot Xenioo, which was acquired in November last year, is increasingly popular with new and existing clients. A European beauty retailer is combining WhatsApp with Xenioo and live agents for efficient chats to improve customer satisfaction and reduce costs. In Italy, a banking group has similarly combined chatbot and live agents for better support and in addition, uses Xenioo for marketing of essential banking services. The virtual reality sports and the tenure Belfast apply senior to respond to frequently asked questions and for quick technical support on site.

LINK has 48,000 customer accounts and has attracted 3,000 new customer accounts over the last year. Net retention rate follows the same trend as organic revenue growth. As we can see from the bottom graph, net retention rate in Q2 of last year was unusually high at 123% due to different seasonality in Q1 and Q2 of last year caused by the pandemic. Net retention rate for the current quarter is impacted by the high comparables but also dampened by some softness in the current quarter. Certain retail clients are lowering spend due to macro uncertainty and longer lead times to scale the revenue on the more advanced CPaaS products sold to existing clients are both lowering net retention rate for the current quarter. New clients are contributing to the growth momentum with 3 to 4 percentage points, which is equal to previous quarters.

LINK has a versatile business model with a solid customer base and product mix, geographical diversification and the huge library of use cases implemented on our close to 50,000 clients. Going into further detail on the use case distribution, we have summarized revenue contribution by our clients' industry classification. As you can see on the top right, 70% of LINK's revenue is generated from utility or notification use cases.

Within this category notification use cases, there are hundreds of different use cases that our clients are utilizing to extract value in their dialogue with end users. This ranges from simpler solutions like onetime passwords to very advanced two-way customer service dialogue. All of these use cases, however, share the same essential attribute New communication is mission critical for our clients as end users need this information to be able to consume their products or service.

Mobile marketing use cases constitutes 22% of LINK's revenue base and are more campaign-oriented or volatile compared to notification use cases. Mobile marketing use cases fluctuates with consumer confidence and seasons. Customer service use cases is 8% of the revenue base and the use case with the fastest expected growth. These use cases are very resilient and countercyclical as they provide both large cost savings and much higher end user satisfaction compared to legacy solutions like IVR.

On this slide, we have split the revenue contribution from notification customer service and mobile marketing per segment to provide additional insight. The 3 enterprise regions, the Nordics, Central Europe and Western Europe all contribute approximately 20% of group revenue from notification use cases. The more resilient economies of the Nordics contribute 8% of group revenue for mobile marketing use cases, almost the same as Western Europe at 7%, while Central Europe is much lower with only 3% contribution from mobile marketing use cases. Increased macroeconomic uncertainty is likely to negatively impact mobile marketing use cases in Central and Western Europe but not to the same extent in the Nordics where the economies are stronger.

For notification use cases, we do not expect a material negative impact in the current macro environment. That was it for me. I'm handing the word over to Morten for a more detailed review of the second quarter figures.

[Morten Edvardsen, executive]

Thank you, Thomas. A very brief introduction of myself. My name is Morten Edvardsen. I've been with LINK for close to 5 years as Group Finance Director, heading Group Finance, including group accounting and controlling teams. In total, I've been working 15 years within the telco industry, both on the operator side and then recently with LINK.

I will now go through the second quarter financials for the group. LINK reports quarterly revenue of almost NOK 1.2 billion, a 12% growth, including M&A. Organic growth, excluding acquired entities, is reported at 4% in fixed currency or an underlying growth of 11% when adjusting for higher comparables in the same quarter last year. This is slightly lower than the run rate in previous quarters, reflecting softer market conditions with increased macroeconomic uncertainty. The second quarter of last year was positively impacted by reopening of societies following government imposed lockdowns, which resulted in pent-up demand in the retail sector.

We also observed high volumes related to COVID testing and vaccination in certain markets. Both of these factors led to high comparable revenues in the second quarter of last year. This reduced year-over-year growth in the second quarter of this year by 7 percentage points, resulting in an underlying growth rate of 11%.

Messaging volumes grew 7%, lower than the reported revenue growth of 12%, reflecting higher share of the revenue streams in acquired entities and a lower contribution from the Global Messaging segment compared to previous quarters.

On the next slide, we are presenting pro forma revenue, including all acquired entities in fixed currency. The figures include revenues for acquired entities before closing for comparison. The upper graph shows the contribution to total pro forma revenue growth from the Enterprise and Global Messaging segments. Total pro forma revenue growth for the second quarter was 3% for an underlying growth of 10% when adjusting for high comparables in the same quarter last year, as previously mentioned. We report a 4% year-over-year growth for the Enterprise segment while the Global Messaging segment remained stable year-over-year, resulting in a total 3% pro forma organic growth rate.

During the second quarter of 2022, we have observed impact from increased macroeconomic uncertainty where businesses adapt to softer demand for products and services by reducing their communication and campaign activities. This is reflected in our revised outlook for the medium-term revenue growth as presented by Thomas earlier.

In the second quarter, we observed softer market conditions driven by the following factors: Central Europe is impacted by the geopolitics related to Ukraine and rising inflation levels, which impacts demand for products and services and reduced activity levels for our clients on commercial activities. In countries like France, Italy and Spain, we observed at increased macroeconomic uncertainty with higher energy prices and both increase in inflation and interest rates negatively impacts consumer confidence. This drive lower activity and is reflected through increased focus on costs by our clients.

In the quarter, we have a churn effect from a high-volume, low-margin client in the Nordics also reported in the first quarter. This impacted group revenue growth negatively by around 1 percentage points for the quarter. The bottom graph displays the growth rates for first half of 2021 and 2022, respectively, per segment and for the total group. The impact on growth rate from strong comparables is less visible when looking at growth for the first half of 2022 with total pro forma revenue growth reported at 9%. The underlying growth rate is 12% when adjusting for high volumes related to COVID testing and vaccination, especially in Austria and Poland last year. The reduction in underlying growth rate compared to previous quarters reflects the softer market conditions as discussed.

Gross profit is reported at NOK 317 million or a reported growth of 18%, including acquisitions. Organic gross profit declined 1% in fixed currency whilst the underlying gross profit growth was 5% when adjusting for high comparables. Reported gross margin improved from 25.4% to 26.9%, including effects from acquired entities.

In the quarter, we observed a 1.4 percentage point dilution in enterprise gross margin. The reduction explains the 5 percentage points deviation between organic revenue growth and organic gross profit growth. We have 48,000 clients across the world with different margin levels and normal variations in country and client mix will always influence the gross margin from period to period.

I would like to highlight the main drivers of the change in organic enterprise gross margin of 1.4 percentage points. Northern Europe, margin dilution explains half of the decline of 0.7 percentage points. We have COGS increases from operators impacting the quarter. These are fully passed on to clients retaining the same nominal gross profit in euro sense, but mathematically resulting in a lower margin percentage with a negative 0.3 percentage points impact.

In the quarter, we saw a stronger growth for lower-margin clients, especially in Norway and Sweden, and this client mix effect impacted negatively by 0.4 percentage points in the quarter. For Central Europe, the margin dilution impacted 0.5 percentage points. Volume growth with a large global IT company with lower margin traffic affected gross margin negatively by 0.3 percentage points. Decline in high-margin COVID-related traffic in Austria had a dilutive effect on margin by 0.2 percentage points year-over-year.

Moving on to adjusted EBITDA. Adjusted EBITDA is reported at NOK 129 million and a total about 8% when including the effect from acquired entities. In the quarter, organic adjusted EBITDA declined 10% due to the high comparable gross profit level in the same quarter last year, as discussed, and increased OpEx. LINK has made investments in go-to-market initiatives to build market adoption for future CPaaS products, which have driven expansion in OpEx. The increased run rate in OpEx related to go-to-market initiatives is about NOK 10 million with a gradual buildup since the second half of 2020. As Thomas mentioned previously, we are addressing churn cost levels to align with the revised near-term growth expectations.

In addition to the go-to-market investments, we are reporting a onetime impact on OpEx related to a claim from French tax authorities for 2019 telecom tax of NOK 4 million. The tax is a special tax on gross revenue, and we disagree with the tax authorities as we believe the tax is intended for the mobile operators. For the sake of prudency, we have booked a percent claim for 2019 in the second quarter. We are, however, currently evaluating further legal actions as a response to the claim. The estimated potential liability for periods after 2019 is NOK 13 million and has not been recognized in the second quarter for financials as no claim has been presented by French tax authorities.

The adjusted EBITDA is lower than previous quarters due to a few factors. Compared to the first quarter this year, we have increased OpEx, reflecting high go-to-market investments and the additional NOK 4 million in costs related to the French telecom tax for 2019. The lower level of adjusted EBITDA compared to the third and fourth quarter of 2021 is driven by the seasonality in the business, especially related to high season for high-margin weather-related critical messaging in the U.S. which also impacts positively adjusted EBITDA margin.

Moving on to the P&L overview. In the previous slides, we have already been through the P&L down to adjusted EBITDA. Nonrecurring costs consist of restructuring costs, mainly related to acquired entities, direct M&A costs and share option costs. Costs, which is not related to the underlying operations of the company. Reported M&A costs are mainly related to external advisory costs and the reported share option costs are the accounting treatment of a future dilution effect from shares to be issued with a very limited cash outflow over time and none in the current quarter.

For Q2, the share option costs are reported only NOK 7.4 million due to a correction of previous periods where we have recognized 2 high costs. The share option costs in the third quarter are expected to be closer to the NOK 14 million as reported in the first quarter before coming down in the fourth quarter as the second of 3 restricted stock unit tranches vest in October. Cost of depreciation is reported at NOK 102 million, in line with previous quarters were of NOK 77 million related to the depreciation of assets driving from purchase price allocations of acquired companies with no cash effect and no future replacement CapEx.

Net financial items are reported positive at NOK 65 million, impacted by a net currency gain of NOK 102 million and interest cost on the outstanding bond of NOK 41 million, including amortized fees. Other financial items consist of a positive residual recognized between an accrued holdback liability and final settlement amounting to close to NOK 5 million.

The total balance sheet is close to NOK 11 billion with a stable equity ratio of 49% compared to previous quarter. LINK has significant cash reserves of over NOK 900 million around NOK 600 million above the level needed for operational purposes. Receivables increased by NOK 122 million year-over-year and payables increased by NOK 175 million. Both increases reflect organic development and normal fluctuations of working capital related to collections from clients and payments to operators. The net interest-bearing debt is reported at NOK 2.9 billion and related to LINK's one outstanding bond. The bond has a low fixed coupon of 3.375% with no maturities before December 2025, securing LINK attractive long-term funding.

The net cash flow from operating activities, including nonrecurring costs per M&A is reported at NOK 484 million. On an LTM basis NOK 194 million in the current quarter, which was positively impacted by movements in working capital. Working capital will vary from quarter-to-quarter, but is expected to continue to be stable over time. Change in working capital over the last 12 months is reported at a positive NOK 26 million.

Cash flow from operations, excluding nonrecurring costs, mainly related to M&A was NOK 566 million on an LTM basis or a ratio of 94% compared to LTM adjusted EBITDA. LINK generates excess cash also after CapEx and interest costs. Looking at the free cash flow after deducting CapEx of NOK 183 million and interest cost of NOK 143 million LINK generated excess cash during the last 12 months, well above NOK 200 million. The full year effect of the acquisitions closed in 2021 will further increase cash generation in 2022 as a whole year of EBITDA will be included in the P&L and by far outweigh the full year increases in CapEx and interest costs connected to the acquired entities.

The leverage remains at a higher level than LINK's financial policy. The financial policy unchanged, and LINK has a top priority to reduce leverage below 3.5x adjusted EBITDA through cash generation, organic growth and potential accretive M&A. The measures to align costs with growth in near-term gross profit, as highlighted throughout the presentation, will support improved cash generation and of deleveraging of the company.

That completes the financial section. Now over to Tom and Q&A.

[Tom Rogn, executive]

Thank you, Morten. We are then ready to start the Q&A. Please dial in to ask questions directly or post questions online. Operator, can you please help us with the Q&A?

[Operator]

[Operator Instructions] The first question is from the line of [Sandzak] Savinovic from Carnegie.

[Predrag Savinovic, analyst]

Thank you, operator. This is Predrag from Carnegie. So not [Sandzak]. But let let's start with the free cash flow. So for H1, it's been quite impressive, I think. And with this figure in mind, we know H2 is generally stronger than H1 from an operating perspective. So I was wondering if you can give any color on the cash flow profile for the remainder of the year and your best guess would be very helpful to hear.

[Thomas Berge, executive]

Yes. Predrag, thank you for your question. I will hand it over to Morten for his answer.

[Morten Edvardsen, executive]

Yes. Usually this is now is stronger in the second half related to the adjusted EBITDA. So that should be sort of improving the cash flow from the operations on a working capital perspective that usually over time is sort of stable. So there shouldn't be a big uplift from that in the second half.

[Predrag Savinovic, analyst]

Okay. So that means basically all equal, the cash flow profile should be stronger than H1?

[Thomas Berge, executive]

Yes. Sort of working capital Predrag, varies from time to time. If you look at the LTM number, you will see that there is a strong correlation between EBITDA and adjusted cash flow from operations. But as you pointed out to sort of working capital varies over quarters. We had a negative impact in Q1 and then a positive impact in Q2, neutralizing it. So the H1 effect is more sort of in line with what we see in the LTM number also.

[Predrag Savinovic, analyst]

Okay. Perfect. Then looking at growth ahead. I mean we are a few months into Q3 already. Would be nice if you could give us some color on the organic growth for the start of Q3 and if it's possible to refer it to your organic growth target, like are we more in the top end or the bottom range of that guidance, how are we currently trending?

[Thomas Berge, executive]

We, of course, cannot be explicit on the growth momentum that we see in the reported numbers as far as Q3 goes. But of course, the forward-looking statement from 8% to 12% is also based on sort of what we are seeing happening so far in the second half. We are in H1 at the high end of the interval if you exclude some of the high comparables that we had in the second quarter of last year. What we have decided to give 8% to 12%, so I've been pointed that due to the uncertainty of the macroeconomic environment, too.

[Predrag Savinovic, analyst]

Okay. Okay. And maybe you mentioned this, Thomas, but how large share of your total traffic is tied to marketing use cases, and it will be helpful if you could break that down into marketing for economies that are not as stable in terms of usage, as you referenced, for example, the Nordics, which is growing and is generally quite stable in usage?

[Thomas Berge, executive]

Yes. If you look at the total revenue contribution, we have that on Slide 12 also just for your -- so you can look at it. You see that the regions are approximately 20% of total revenue contribution is driving from notification use cases. The Nordics have 8% of total revenue, total group revenue from mobile marketing. Here, we see where we expect less exposure from the macroeconomic environment as the economies are stronger. We have 3% of mobile marketing revenue in Central Europe and then 7% in Western Europe. So 10% of total group revenues deriving from mobile marketing use cases, which are more exposed to the volatility of the macroeconomic environment.

[Predrag Savinovic, analyst]

Okay. That's perfect. And then finally, I read that your new guidance, it does include a lower contribution in terms of net retention rate. And in this guidance, what is your assumption then in terms of new customer wins driving growth for the remainder of the year? So in other words, to what the read is your new guidance relates to customer wins and to what degree is it the net retention, roughly speaking.

[Thomas Berge, executive]

Yes, new clients or new contracts are estimated to be in line with the historical performance that we have seen, which is between around 3% to 5%, normally, various a little bit sort of when bigger clients -- or bigger agreements are signed. And then when you deduct that from the forward-looking statement on revenue growth between 8% and 12%, you will basically get the net retention rate.

[Operator]

The next question is from the line of [Alex Yen] from Jefferies.

[Unknown Analyst]

2 from my side. I just want to go back on the organic growth commentary. So if I just take the lower range of the guidance, which is 8%, it indicates that in the second half, you guys would have to deliver around 13%. And if I take that into account and look at the 2-year stack, I think the stack got had incrementally in the second half. So I guess my question would be how confident are you in terms of achieving the guidance and how much visibility can you comment on? And then the second question would be on the initiative to reduce OpEx. So what particular areas are you looking to improve or cut? And then how fast can this OpEx reduction get reflected into the P&L?

[Thomas Berge, executive]

Okay. Thank you. Regarding the forward-looking statement between 8% and 12% on revenue. This is based on how we see the world now. If things develop according to the current set of assumptions, then we are pretty comfortable with reaching 8% to 12%. But we are having some uncertainty and some difficulties in transparency due to the macroeconomic environment need to be forthcoming on that too. So if that materially worsens that can impact the growth momentum. Yes.

Regarding your question on OpEx, we have said that the commercial investments in the go-to-market has increased revenue by approximately NOK 10 million per quarter, which is translating into an annual effect of NOK 40 million. And our ambition is to cut costs. So that OpEx increase is mitigated. Most of the OpEx reductions will be executed on within Christmas, but there will also be a small tail most likely into Q1.

[Operator]

Okay. As there are no further questions at this moment, I will hand it back to the speakers for any online questions.

[Tom Rogn, executive]

Thank you. We will then continue with posted questions that has not already been answered. To follow up on the OpEx reduction, [Mats Rosendahl] also is asking more specifically about CapEx reductions, timing and size of them.

[Thomas Berge, executive]

I think you can assume that the CapEx reduction will follow a similar pattern compared to OpEx reduction, both when it comes to size and when it comes to time line.

[Tom Rogn, executive]

[Mats Rosendahl] has a follow-up on -- regarding the process of finding a new CEO.

[Thomas Berge, executive]

That is in progress. The Board is the first responsible for finding a new CEO. The Board wants to be sure that we find a CEO with the right profile and the right candidate and are confident that the company is managed in the interim period in a good way. So I don't have a specific time line. It depends on yes, sort of the candidates that we come across or that the Board comes across over.

[Tom Rogn, executive]

Next question is from Daniel Gullberg. He wants to have some more color on the growth of Message broadcast in the quarter.

[Thomas Berge, executive]

Yes, that's a question for Morten.

[Morten Edvardsen, executive]

Yes, year-on-year in Message Broadcast, it's declined 12% for the quarter to formalized.

[Thomas Berge, executive]

That is mainly due to delays in professional services revenue. Contracts are agreed upon with bigger clients on an annual -- or beginning of each annual year and a couple of clients. We have had a delay in contract signings. So there is lower revenue momentum from professional services in H1, and that is going to spill over into H2. And contracts are signed and our revenue are recorded in the P&L.

[Tom Rogn, executive]

Then Daniel has a follow-up question that has not already been answered regarding LINK's ability to pass through price increases from operators.

[Thomas Berge, executive]

Yes. As we said before, we have a very, very high ability to pass COGS increases from the operators towards the enterprise clients. That is something we have had experience from time to time of doing. And we have never had the issue that this wasn't possible to do the enterprise clients understand that we cannot absorb a COGS increase from the mobile operators and the products that we are having, they are fairly sticky. So there is a fairly large alternative cost for the clients if they want to choose another vendor. On the aggregator market, where the products are not as sticky there, we are seeing that it's more difficult to pass on COGS, but it's still doable.

[Tom Rogn, executive]

Next question is from [Jesper Sugimori] and he's referring to LINK's focus on mature CPaaS solutions and Rock specifically hyper solutions LINK is referring to. And also a follow-up on that on what type of visibility you can see for marketing activity, especially in markets like France.

[Thomas Berge, executive]

We see there are a lot of market demand for certain CPaaS products, especially in the customer support segment. There is a big demand for chatbots within the customer service. We have Xenioo, which is an excellent chatbot solution, and we are upselling that to existing clients and also to new clients. We see traction on both mobile marketing and modification on WhatsApp. We're struggling more with RCS with the market demand, but in WhatsApp are in demand, both on notification and mobile marketing use cases, but they are coming from sort of a low level. So the growth in percentage side, but the impact still in NOK is, of course, lower. We also see a demand for more complex mobile payment products in connection with a messaging use case. So that's an answer to that.

The insight into how the retail clients are behaving. It's lagging normally by 2 to 3 months before we see a clear pattern. But after the initial sort of 2 to 3 months, we have a fairly good insight into how our biggest retail clients are thinking at least. It will be too manual to follow up all retail clients, but the biggest one, we are in contact on a weekly basis.

[Tom Rogn, executive]

Then Jesper, as a follow-up on -- specifically on the negative contribution to gross profit growth in the second quarter in the Nordic and the Central European segments.

[Thomas Berge, executive]

Morten?

[Morten Edvardsen, executive]

Yes. I think for Central Europe, the main driver is the -- related to the high margin COVID traffic that we had last year, which came with a high margin. So that's the main driver for the decline. It's basically the revenue mix. And Nordics is also driven by growth from lower margin clients in the quarter. So that's the main effects in those 2 regions.

[Tom Rogn, executive]

Follow-up from Jesper is considering the new revenue guiding, how does that impact the Link's financial policy of having a leverage below 3.5x?

[Thomas Berge, executive]

When we are having a slower growth on revenue momentum, that translates into a slightly slower growth on gross profit, which also trickles down to EBITDA. This is why we're doing the OpEx trimming. So we make sure that we delever as soon as -- or as fast as we possibly can. And we're also doing CapEx cuts. So we increased cash generation which will also then reduce the leverage.

[Tom Rogn, executive]

Then I have questions from [John Tamber], and he is referring -- LINK is referring to higher comparables for the second quarter of this year comparing to '21? What is the insight on the comparables for Q3 this year?

[Thomas Berge, executive]

The impact there is much less. We had a very high second quarter as we had the catch-up effect from a low first quarter of last year. On top of a very high vaccination traffic in 2 countries or testing traffic related to COVID. We had some volumes on COVID also in the third quarter and to a much lesser extent in the fourth quarter, but we do not see that comparables for those quarters should be as tough as we saw in the second quarter, more normalized. Yes.

[Tom Rogn, executive]

Then I have a question from [Jacob Peterson] -- he is referring to in strong cash balance and strong cash flow and if the company would consider buying back debt at a discount in the market.

[Thomas Berge, executive]

This is something we are considering, but no decision has been made. So as of now, we haven't executed on it, but we are aware that, that is an alternative, of course, we are having a lot of excess cash. We want to use that on acquisitions, especially on the -- in the current environment, smaller bolt-on acquisitions with low EBITDA multiples. But that is being assessed on a continuous basis, how to best utilize the excess liquidity.

[Tom Rogn, executive]

Then we have a question from [Marrio Smiles] and he's specifically referring to small and medium-sized enterprises and how you expect spending to develop for these type of businesses in the current macro environment?

[Thomas Berge, executive]

We see the same trend as the bigger enterprise clients. We see that it's especially the retail clients in the weaker economies that are reducing their marketing spend as a response to lower consumer confidence on the small- and medium-sized clients where there are notification use cases and customer support use cases, we see stable a growth.

[Tom Rogn, executive]

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