Link Mobility Group Holding ASA

OSE:LINK

Earnings Call Transcript 2024-Q3

[Morten Edvardsen, executive]

Good morning, and welcome to the Third Quarter 2024 Financial Results Presentation for LINK Mobility.

My name is Morten Edvardsen, CFO and Head of Investor Relations. And on this morning, I'm joined by Thomas Berge, CEO. And together, we will present the results. After the presentation, there will be a Q&A session. Please post questions online during the presentation.

Thomas, the word is yours.

[Thomas Berge, executive]

Thank you, Morten.

The third quarter of 2024 is another strong quarter, with growth rates in accordance with the company's communicated expectations. Gross profit growth in high-single digits and adjusted EBITDA growth higher than gross profit growth due to LINK's scalable business model. LINK is the leading and largest CPaaS player in Europe. We started out more than 20 years ago in the Nordics, and have 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 touchpoints with our clients. We have numerous sales reps, customer service and customer success employees on the ground, winning new contracts and supporting existing clients in the 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 30 offices in 18 countries are a result of the successful implementation of this strategy over many years. Group revenue during the last 12 months was recorded at over NOK 6.9 billion. LINK has grown significantly over the last years with a revenue CAGR of 20%. 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 686 million on an LTM basis, up from NOK 630 million reported end of last year. LINK has a central position in the industry value chain, supporting clients with connectivity and SaaS solutions to enable clients to communicate with end users. Enterprises have a constant need to communicate and inform their end users, and the enterprises are increasingly choosing the mobile phone as the communication channel towards the end users. This megatrend is being driven by the end users. We prefer that enterprises communicate with us over the mobile phone and the enterprises adapt.

LINK has the connectivity to the mobile operators and relevant OTT channels, which is combined with our software solutions to provide our enterprise clients with an end-to-end communication solution towards their end users. Those software solutions include chatbot, marketing automation, CDP, payment solution and template builders and managers. LINK's software solutions combined with the connectivity enables a state-of-the-art multi-channel and conversational communication platform, ensuring satisfied end users and high return on investments for our clients.

The third quarter was a strong quarter, with organic gross profit growth in line with expectations. The quarter is a continuation of the solid performance the company has reported over the last 6 to 7 quarters. Revenue is reported at over NOK 1.6 billion stable versus same period last year. The enterprise segment is growing nicely, with a growth of NOK 87 million or 8%. Revenue in Global Messaging has declined NOK 87 million due to LINK terminating selected high-volume low-margin aggregator clients and refocusing the business unit from growth to profitability.

The aggregator business in Global Messaging is more volatile and less sticky compared to the enterprise regions. Clients come and go based on clients' decisions and the decisions on the LINK side. Since last year, LINK has had a more restrictive policy on assigning credits, declined in Global Messaging due to increased bad debt risk. LINK has since Q3 last year terminated several low-margin clients, reducing revenue growth but still increasing gross profit growth and gross margins in this segment.

Gross profit is reported at NOK 357 million, or an organic growth of 9% in fixed currency, which is in line with expectations of high single-digit gross profit growth. Gross profit growth outpace revenue growth due to revenue decline and profitability increases in Global Messaging and higher growth momentum in the enterprise regions on the more advanced solutions like marketing platform with higher profitability than existing products.

The Nordics and Central Europe reports a growth rate in line with previous quarters, continuing their solid growth momentum. Western Europe has over the previous quarters outgrown the market and the other enterprise regions. In the third quarter, Western Europe reports a lower growth momentum than previous quarters due to churn on a larger client that went into bankruptcy and additional COGS accruals from disputed operator price increases in Italy. The COGS accruals are calculated based on a conservative approach and LINK hope for a lower impact when the final decision is taken in Q4.

Adjusted EBITDA is reported at NOK 166 million, or an organic growth of 10% in fixed currency, higher than gross profit growth due to LINK's scalable business model. LINK also generated high net operating cash flow of NOK 200 million. We closed the acquisition of NRS in Spain and Reach Interactive in the U.K. We have a solid portfolio of M&A opportunities, consisting of profitable and accretive targets both within Europe and outside Europe. I will go into more detail later in the presentation.

LINK executed a very successful refinancing of the existing bond. During the quarter, the company refinanced EUR 125 million with a 5-year tenure and a coupon of 2.35%. Gross profit is reported at NOK 357 million and an organic growth of 9% in fixed currency. The enterprise segment reports a gross profit growth of NOK 18 million. Global Messaging experienced a revenue decline of NOK 87 million, but a gross profit growth of NOK 9 million. Gross profit margins for Global Messaging varies with the attractiveness of routes and customer mix. Global Messaging has terminated several lower margin aggregator contracts to avoid bad debt risk, combined with activities to maximize profitability.

Different routes have varying profitability depending on market pricing and our ability to access lower COGS than market average, which varies over time. In the current quarter, LINK prioritized pursuing higher-margin business and down prioritized revenue growth. Gross profit growth for Western Europe is lower than previous quarters. The growth momentum in Western Europe in Q3 was reduced by disputed operator price increases in Italy, combined with an unexpected churn of a larger client. The churn was isolated and triggered by a bankruptcy process.

As I've said before, the COGS accruals are a calculation based on a conservative approach and we hope for a better outcome when the final decision is taken in Q4. Nordic and Central Europe is continuing in accordance with the trends of the previous quarters. The enterprise growth was 8% when excluding the mentioned isolated effects in Western Europe, which amounts to NOK 6 million in lower gross profit in the current quarter. The graph at the bottom of the slide displays the margin impact from the segments. Margins has increased year-over-year due to the higher profitability in Global Messaging. The small decline in margin for the enterprise region is due to the additional COGS accruals connected to the disputed operator price increases in Italy.

Underlying customer margins and customer pricing are stable with no material price reductions. LINK's revenue churn is extraordinarily impacted by the terminated contracts in Global Messaging, with minimal effect on gross profit growth. Looking at the enterprise churn, it is reported at 2.5%, somewhat higher than previous periods. The enterprise churn in Q3 was impacted by the churn, bankrupt client in Western Europe by 0.7 percentage points. Carving out this more isolated churn case, the enterprise churn are within the normal range of between 1% to 2% of revenue reported at 1.8%.

Net retention in Q3 is also heavily impacted by the terminated contracts in Global Messaging. Net retention, excluding the terminated contracts in Global Messaging is reported at 103%. The isolated churn customer in Western Europe contributes with 1 percentage point reduction in NRR. LINK has a significant improvement in new business win over the last 2 years based on the renewed focus and changes in commercial execution initiated in mid-2022. The graph on the bottom left shows the estimated annualized gross profit on new contracts. The number are extracted from our CRM system and the estimations are based on contractual arrangements and specific dialogue with clients. 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.

Won contracts in Q3 are lower than other quarters as summer break pauses commercial activities. The current quarter resulted in NOK 28 million in expected gross profit, or 16% higher than same period last year. Isolating the new contracts for advanced conversational products named CPaaS in the graph, the current quarter is at NOK 11 million on estimated gross profit. We observed more traction and 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.

The OTT channels are in high demand. RCS and WhatsApp, combined with chatbots and other software solutions are growing rapidly. The main use cases are mobile marketing and customer support use cases. LINK is further enhancing its SaaS solution with AI content creation to help our clients to automate more of their campaign activity. Historically, about 75% of gross profit is recorded in the P&L after 12 months. We expect the higher contract backlog to benefit gross profit growth gradually. The more advanced CPaaS contracts take longer time to scale volumes versus legacy products, but of course, results in immediate and higher license revenue. LINK has a healthy sales pipeline in addition to the new agreements won.

RCS, it's a feature-rich channel that we expect significant growth from going forward. RCS can be viewed as SMS Version 2 as the channel is embedded in the SMS app, but with all the functionality and features that we are used to on, for example, WhatsApp or iMessage. RCS has been on the market for several years, but until now only been available or compatible on selected Android handsets. Apple has not opened up for RCS until now. This has held back the adoption significantly.

Apple launched RCS on iOS 18.1, and Apple are gradually rolling out this feature through mobile operators in Europe. We expect material commercial traction on RCS when we can reach all end users with the increased security, features and ease of engaging into conversational dialogue. RCS is rapidly growing as we speak, but we expect this growth to accelerate when the channel is available for most end users. LINK is closing new contracts on RCS, combined with our chatbot solutions and mobile marketing software solutions. We have added 2 examples of new contracts on RCS that we won in the current quarter to emphasize the growth opportunities that we see in the market.

In addition to organic growth opportunities, the company is well positioned for inorganic growth through M&A. LINK has the competence, the historical track record for value creation through M&A and a solid pipeline with M&A targets. Since 2015, LINK has closed over 30 acquisitions, of which the majority have been a great success, generating significant value. LINK has a target of growing 10% inorganically on adjusted EBITDA through acquisitions, in line with historical performance.

So far this year, LINK has closed 3 acquisitions, EZ4U in Portugal, NRS in Spain and Reach Interactive in the U.K. and more is expected to come. In Portugal, LINK will have a 15% plus market share, and we expect to take additional market share going forward. With the acquisition in Spain, LINK has increased the market share to 26%. And with a more capable and stronger combined entity in the country, we believe a further increase in market share is likely. We have a large customer stock to do upsell activities and also a smaller footprint in Colombia and Mexico, which will improve the growth momentum going forward.

We are increasing our presence in the U.K. market, with the acquisition of Reach Interactive. Further acquisitions in the U.K. are prioritized. All of those 3 acquisitions had a multiple of between 6x and 7x cash EBITDA and was highly accretive to LINK's own valuation. LINK has a large M&A pipeline with profitable and high-quality targets. Bolt-on in Europe have a priority, but we're also looking outside Europe. Valuations on private companies in our space have been reduced since 2021 and '22, and we see a target valuation of between 6x to 8x cash EBITDA before synergies. The quality of the customer base, growth momentum of the targets and synergy potential are the main criteria, placing the valuation in the mentioned range of 6x to 8x cash EBITDA.

We have 12 prioritized targets. Most of them are located in Europe. These prioritized targets have an EBITDA target of up to EUR 40 million. Of these 12 targets, LINK has 4 companies under due diligence as we speak. 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 the adjusted EBITDA growth to be higher than the gross profit growth due to our scalable business model.

LINK has NOK 2.5 billion in cash reserves. The cash position will be further strengthened by time, as the company historically generates approximately NOK 400 million in free cash flow on a yearly basis. The high cash reserves will be used for acquisitions under significant repayment of the existing bond when the last tranche of the bond will be refinanced in 2025. Acquisitions will not increase net debt beyond a leverage ratio of between 2.0 to 2.5.

That was my part of the presentation. I'm handing the word over to Morten, who will go through the financial section.

[Morten Edvardsen, executive]

Thank you, Thomas.

Firstly, I will touch upon the recent refinancing, which we finalized early October. Our LINK01 bond with original principal of EUR 370 million matures December 2025, and we have acquired own bonds totaling EUR 74 million. Considering the time to maturity, progress on M&A pipeline and observation of an attractive market for new bond issuance, we decided to refinance parts of LINK01. The outcome was issuance of a new 5-year EUR 125 million Eurobond issued on October 23. Interest terms on the new bond, LINK02 are 3-month Euribor plus 2.35%. Other terms are fairly in line with LINK01 bond, but allowing more capacity for dividends beyond maturity of LINK01.

In conjunction with the new issuance, EUR 125 million of LINK01 was repurchased at a call price of 101% and together with NOK 74 million in own bonds holdings canceled. This has resulted in a bond maturity profile with EUR 171 million maturing December next year and NOK 125 million in December 2029, with a current average interest rate of 4.25%. We also concluded our share buyback program on October 16, with a total of 17 million shares acquired at an average price of NOK 20.71. The cash impact in the third quarter was NOK 128 million and NOK 352 million in total for the program. The treasury shares held are to be utilized for employee incentive programs.

Then to the quarterly financials. LINK reports quarterly revenue of NOK 1.66 billion, a 4% reported growth year-on-year, with positive currency effects of NOK 55 million and contribution from acquisition of EZ4U in Portugal of NOK 5 million. Organic revenue in fixed currency remained stable, impacted by the mentioned effect of proactively terminating low-value traffic in Global Messaging. Total revenue in fixed currency was stable as the growth contribution of NOK 87 million from enterprise segments was offset by the 18% decline in the Global Messaging segment.

Organic growth in the Enterprise segment was 8% in stable currency in the quarter. Enterprise revenue growth in the quarter was somewhat softer compared to previous quarter related to the extraordinary volumes in Central Europe last quarter, not replicated in the third quarter, but the Central Europe region still delivered a strong 17% top line growth. In Northern Europe, revenues remained stable, mainly driven by the internal shift of global clients to Central Europe, representing approximately 3 percentage points impact on year-on-year growth and underlying slight decline in lower value traffic with a few clients.

Western Europe organic revenue growth was reported at 7%, impacted by the isolated bankruptcy churn effect of NOK 8 million in revenue, leaving the underlying growth momentum at 9% in stable currency. Growth is supported by the strong commercial results and contribution, both from organic growth on existing contracts and also implementation of signed contracts last quarters. Total volume reported for the quarter was 4.5 billion messages, representing a year-on-year growth of 6% and impacted by the proactive termination of low-value traffic in Global Messaging. Enterprise volume growth was 9% and in line with revenue growth. Growth in other messages was 21% year-on-year related to OTT and other channels.

Moving over to the next slide on gross profit. Gross profit is reported at NOK 357 million, or a reported growth of 13%, with a positive impact from currency of NOK 11 million. We are pleased to deliver another quarter with solid gross profit growth in line with expectations. As mentioned, isolated bankruptcy churn and accrued COGS related to operator price increase in Western Europe impacted gross profit by NOK 6 million in the quarter or approximately 2 percentage points on year-on-year growth.

Enterprise segments reported growth of 6% in stable currency and 8%, excluding the 2 mentioned effects and was in line with top line growth. Northern and Central Europe results are in line with trends from the first half. The lower graph shows development in the gross margin level in the enterprise segment, which remained stable over time at approximately 26%. In the quarter, the impact of the disputed COGS increase had a 0.3 percentage points impact on the margin, while other effects are related to traffic mix changes. Underlying margin per client remained stable.

The gross profit growth in the enterprise segment has been strong and in the high end of expectations over the last quarters with double-digit growth. We observed softer growth in the third quarter, mainly explained by the 2 isolated impacts in Western Europe. One of the mobile operators in Italy announced a new termination price for SMS from July. Due to asymmetry and application of increase across aggregators, this was disputed to the regulator in which have communicated that price will be decided on in Q4. LINK is awaiting clarity on pricing before passing on the increase to clients. Hence, a NOK 3 million additional cost is recognized in the third quarter financials, lowering Western Europe gross profit.

The second impact is related to the churn of a large client going into a bankruptcy process. The effect of the churn was NOK 8 million revenue and NOK 3 million gross profit in the third quarter. The relatively high margin is related to the OTT share of the client in the same period last year. We expect the effect in the future quarters to be somewhat lower and between NOK 2 million to NOK 2.5 million. As displayed, the organic growth momentum in Western Europe came down in the third quarter and was reported at only 2%.

Excluding the mentioned effects, the organic growth rate in the region was 8% in the third quarter and quarter-on-quarter impacted by entering periods of higher comparables. Northern Europe growth momentum is fairly in line with first half and is also in the third quarter impacted by the shift of selected global clients to Central Europe, with an effect of 2 percentage points on growth. In addition, in the third quarter, we recognized a one-time negative effect on gross profit, impacting another 2 percentage points on the growth momentum in Q3. Central Europe reported a 15% gross profit growth in stable currency in line with previous trends, driven by top line growth and continued implementation of CPaaS solution with global clients.

Then to the next slide on adjusted EBITDA. Adjusted EBITDA is reported at NOK 166 million, a reported growth of 13% and 10%, or NOK 15 million in stable currency. Growth is driven by NOK 27 million organic gross profit growth, while the mentioned effect of churn and COGS increase in Western Europe directly impact adjusted EBITDA with NOK 6 million in the quarter. Gross profit was partly offset by growth in OpEx of NOK 12 million. The organic OpEx growth was 7% year-on-year and driven by inflation in salaries and other cost items in addition to impact from organic growth. The inorganic growth contribution from EZ4U in Portugal was NOK 1.6 million in the quarter.

Adjusted EBITDA margin improved year-on-year by 1 percentage point, driven mainly by the expansion in gross margin. In the lower graph, we have bridged the effects from non-recurring costs between adjusted EBITDA and EBITDA in the third quarter. In total, we recognized non-recurring costs of NOK 38 million in the quarter. Costs related to share option was reported at NOK 15 million and includes outstanding incentive programs and employee share option programs. The ordinary cost of such programs were NOK 6 million, while an additional NOK 9 million was recognized in increased social security tax liability related to increased share price in the third quarter.

M&A costs were NOK 13 million in the quarter and includes an NOK 11 million item related to an error in the opening balance of AMM acquired in 2021. Unrecoverable receivables of NOK 11 million was erroneously included in the opening balance and a recent review have concluded that the write-off should be done. Due to the nature of the item, it is recognized as a non-recurring M&A cost in the third quarter financials. Remaining costs were related to closed and ongoing M&A processes. The non-recurring costs related to restructuring was recorded at NOK 9 million, mainly related to severance agreements across the footprint. After deduction of non-recurring costs, EBITDA was reported at NOK 129 million, or up NOK 9 million compared to the same quarter last year.

Moving on to an overview of the P&L. I will only focus on a few items, as we have been through development in adjusted EBITDA and non-recurring costs for the quarter. The cost of depreciation and amortization is reported at NOK 86 million, a NOK 3 million increase year-on-year, whereof NOK 1 million from the EZ4U acquisition and the remaining driven by currency movements. Net financial items are reported at negative NOK 21 million and includes a net currency loss of NOK 8 million, mainly related to currency revaluation of the bond and intercompany loans. Net interest costs reported at NOK 12 million includes NOK 37 million in bond interest costs, NOK 4 million in amortized transaction costs, partly offset by net interest from cash deposits and interest income on own bonds held, totaling NOK 29 million in the quarter.

Then to the balance sheet. Non-current assets amount to NOK 7.5 billion, whereof NOK 4.7 billion in goodwill. Main driver for the year-on-year increase is own bonds held totaling NOK 871 million as of the third quarter. Currency effects and the effect of adding EZ4U in Portugal and Net Real Solutions in Spain, totaling close to NOK 190 million. The own bonds held were canceled in October, as mentioned. Trade and other receivables includes the sellers' credit and earn-out related to divestment of the U.S. business, Message Broadcast, totaling close to NOK 400 million due in the second quarter 2025 and is the main driver for the increase year-over-year. No adjustment has been made to the earn-out estimate included as of the third quarter.

Reported receivables, excluding items related to the U.S. divestment remained stable year-over-year and payables increased by NOK 71 million year-over-year and was impacted by currency adjustments of NOK 63 million and NOK 58 million, respectively. Acquisition added NOK 26 million to receivables and NOK 19 million to payables. The underlying decrease in receivables was positively impacted by the release, following less beneficial cutoff last quarter and received interest earned in the first half. Underlying year-over-year development in payables was fairly stable.

Cash reserves were reported at NOK 2.5 billion and expanding year-over-year, mainly from contribution from the U.S. divestment with NOK 2.2 billion received in the first quarter, cash generated from operations and partly offset by buyback programs for own bonds and shares as well as acquisitions. During the quarter, LINK acquired own shares for NOK 128 million, while the net consideration paid for NRS in Spain was NOK 107 million. Net interest-bearing debt is reported at NOK 975 million, calculated in accordance with our bond agreement with gross debt related to the EUR 370 million outstanding bond, less own bonds held of EUR 74 million.

Quarter-on-quarter, net debt was up only NOK 52 million despite the acquisition of NRS with cash outflow of NOK 107 million and share repurchase of NOK 128 million due to the strong cash flow from operations of more than NOK 200 million. The receivable sellers credit item of NOK 109 million related to the sale of Message Broadcast is not considered deductible for net debt calculation according to bond terms, hence not included. Leverage was reported at 1.4x pro forma LTM adjusted EBITDA end of the third quarter and was stable quarter-over-quarter.

Further to an overview of key operational cash flow items. Figures are excluding the U.S. historically, except for bond interests, which are included in full for the historical periods, also reflecting the financing cost of the U.S. during LINK ownership. Operational cash flow in the quarter was reported at a strong NOK 201 million, positively impacted by interest received totaling NOK 55 million. Year-to-date interest related to accounts carrying the main share of proceeds from the U.S. divestments was received and explains the increase compared to previous quarters.

Following the working capital build in the second quarter related to cutoff timing, we recognized a normalization in the third quarter related to outstanding receivables. And on an LTM basis, working capital normalized to a positive NOK 33 million. Over time, we expect the level to be neutral. Taxes paid reported at NOK 35 million in the quarter and related to historical periods, an increase driven by improved net income across the footprint. CapEx was reported at NOK 42 million or higher quarter-over-quarter, mainly related to acquisition of tangibles and external vendors. Due to the biannual bond interest payments, the main share of bond and lease payments are related to leases in the third quarter.

The new LINK02 bond issued has quarterly payments, hence, some shift in quarterly bond interest payments is expected going forward. After deduction of CapEx and lease payments, we delivered a strong free cash flow of NOK 178 million in the quarter and NOK 433 million on an LTM basis after CapEx and interest paid. Following the partly refinancing, we still reiterate that the financial policy remains of net debt not exceeding 2x to 2.5x LTM pro forma adjusted EBITDA.

That completes the financial section. Now, we open up for Q&A. Please post your questions online.

[Morten Edvardsen, executive]

We have received some questions online. And the first 4 questions are from Jesper Stugemo in Handelsbanken.

The first question, elevated customer churn and historically low net retention rate of 95%. The net retention is down year-on-year even if adjusting for terminated traffic. The 15.6% churn in Global Messaging, how much of the increase is related to actually terminating low-value traffic versus losing important clients?

[Thomas Berge, executive]

The churn in Global Messaging is our decisions. We have terminated several low-value clients or contracts, both because we see that we are not able to achieve a satisfying profitability on these contracts and also because some of these clients, we don't view them as creditworthy. We don't want to take the bad debt risk on these clients. So to summarize, all of this churn is our decision that we proactively did the initiatives to terminate the existing business relationships.

[Morten Edvardsen, executive]

Second question is, this is sort of a new strategic direction. I think we can confirm that this is an ongoing evaluation of the margin and the credit risk in this segment. The third question, one of your larger U.S. peer reported last week and downplayed the RCS impact to the business in the U.S. related to revenues and margins in terms of the dynamics of the business. What's your take on the RCS dynamics on revenue and margins in the European market long term?

[Thomas Berge, executive]

The U.S. is not comparable on RCS with Europe. RCS is much less mature in the U.S. And the mobile operators, they have not prioritized RCS to the same extent as we have seen in Europe. In Europe, we got RCS, both on Android terminals and Apple terminals in Spain, France, U.K. and soon Germany. When there are several other mobile operators in Europe that has RCS on the Android through Google Guest Cloud, we have them some in Norway, some in Sweden, one in Italy. We have one in Austria and so on. So, RCS in Europe is more advanced than in the U.S. So, I think that's sort of a rational explanation for that.

[Morten Edvardsen, executive]

Yes. I think that covers the next question related to carriers being ready for RCS. So, we touched upon that.

And then last question from Jesper then is the bankruptcy churn in Western Europe. Is this related to one or several clients?

I can confirm that, that is related to one client.

And next questions are from Olav Rodevand in Pareto. Could you elaborate more on the growth in Northern Europe? What drives this, and how these drivers have developed so far into Q4?

I think for -- if we look at the gross profit growth in Northern, that was reported at 3%. As we have communicated previously, we shifted larger clients internally to Central Europe, which impacts 2 percentage points on the gross profit growth. And we had also a one-time effect on gross profit, also impacting just below 2 percentage points on the growth in the third quarter. So the growth rate is fairly in line with what we've seen in the first half of the year. The key drivers are mainly growth on existing clients, but we also have seen traction or see traction and implementation of contracts related to CPaaS and specifically on contracts related to the marketing automation products that we have launched in the Nordics.

The second question, Olav, is in terms of whether we can give some flavor on the customer, which went into bankruptcy and which industry this client is operating in?

We can -- I think what we can say is that it's a client operating in the retail space.

Then we move over to some questions from Petter Kongslie from Sparebanken Markets. The first one is, can you give an example of CPaaS order intake you won this quarter in terms of a customer example?

[Thomas Berge, executive]

Yes. I would prefer not to talk about specific customers on an open line because of competitive reasons and also because we need client approvals in order to sort of name the brand behind the won contracts. What we see is that we have a lot of traction on RCS and WhatsApp, combined with chatbots and advanced mobile marketing solutions. And we are also, in the third quarter, having a very good growth on won contracts on more pure chatbot solutions.

[Morten Edvardsen, executive]

Second question related to aggregator termination again. Can you say something more about how many clients, region and type of customers you terminated?

[Thomas Berge, executive]

Yes. This is a typical smaller and medium-sized aggregator clients. They are located more or less in Middle East, Europe and Asia. Yes, I think it's -- there's no point going into more details than that maybe.

[Morten Edvardsen, executive]

Is there other aggregator traffic that are at risk? Moreover, how much of the volume in LINK is 2-way authentication messages?

[Thomas Berge, executive]

When you look at our enterprise regions, we have very small portions of volumes coming from 2-way authentication messages. It's mainly smaller software vendors, architects and so on, and banks in a very few countries that we're having. So it's a very small portion of the enterprise volume. When you look at the volume in Global Messaging, then, of course, the 2-way authentication is a bigger portion of it. Right now, in Global Messaging, we see that we have a revenue decline, but quite a good gross profit increase. So, we would like to maintain the current situation, and we don't see any more aggregation traffic right now that are at risk for being cut by LINK.

[Morten Edvardsen, executive]

Next question is related to the gross margin improvement quarter-over-quarter and specifically related to enterprise gross margin.

I think I can cover that. As we communicated last quarter, we had significant volumes from one client in Central Europe. This was not replicated in the third quarter. So the margin uplift on enterprise is mainly coming from that, but it's also impacted, as we said on the call previously, impacted by the additional costs related to the operator price increase in Italy, which is impacting approximately 0.3 percentage points on the margin in the enterprise segment.

Next question from Petter is how does the price increases from telcos work in practice? Are you able to move that over to the customer?

[Thomas Berge, executive]

Yes, I can start answering that one. Yes, we always move any price increases from the operators to the customers. This happens normally with the same timing as we receive the price increases in more or less all our countries, our customer contracts. They reflect our mobile operator contracts when it comes to the noticing period for any price increases from the mobile operators. So, this is something we're doing from time to time, and we don't have any problems offloading it. Italy is a special circumstance where the mobile operator launched a price increase from July 1. And both the timing and the price increase itself is being discussed now, both with the telco regulator in Italy and with the mobile operator. We have made accruals based on worst-case scenario where we will have the full increase from July 1, which I hope and believe is not going to be the case. The timing will hopefully slide. And also, we are working on the price increase itself to get considerably lower.

[Morten Edvardsen, executive]

Then next question from Petter is, can you comment on the M&A pipeline? What is the average and/or total revenue and EBITDA of the 12 in the pipeline and 4 in DD?

[Thomas Berge, executive]

Our M&A discussions are being prioritized based on our view on the content of the target and the attractiveness of fitting it into LINK. The 4 that we're having in DD are targets, which are on the top of the priority to investigate further and hopefully also to sign the SPA and close the transactions. I would prefer not to go into details on EBITDA or any other specifics of the target as these discussions are confidential, and we prefer to sort of keep this information to ourselves until we've signed the SPA at least.

[Morten Edvardsen, executive]

Yes. Then we move over to some questions from Kristian Spetalen in Arctic.

First one. Year-on-year growth in enterprise segment fell from previous quarters, even adjusting for one-off events in the third quarter. Could you elaborate on this inconsistency with the stable backlog? Is there any timing effect on new contracts for Q3 or other headwinds to account for?

[Thomas Berge, executive]

Yes. I can start, maybe, Morten. In Q1 and Q2, we overdelivered compared to the communicated set of expectations, which was high single-digit gross profit growth, partly because we were having quite a lot of revenue traction on a client in Central Europe, a low-margin, high-volume client, which in the third quarter has reduced the volumes as expected. It was very campaign driven. Additionally, Q3 is a low season, and we see more variations historically in the activity in Q3 compared to Q1 and Q2. It depends a little bit on how the different enterprise clients decide to do their volumes during summer vacation, which varies also in Europe. In the Nordics, July is the main month for summer vacation. And then in Southern Europe, it spreads into August and partly September.

[Morten Edvardsen, executive]

Next question is whether you can elaborate on the NOK 5.5 million increased R&D cost quarter-on-quarter?

I think I can cover that. In the quarter, we recognized some additional investments related to projects, mainly involving security investments, some AI investments, which we are working on some testing and also some software solution sort of surrounding the new channels mainly. And this was mainly related to consultants cost.

The M&A expenses seems high relative to the acquired companies. Is it related to higher DD activity in general as well? The M&A cost is reported at NOK 13 million in the quarter. I would like to touch upon that there is one large item, which we have included as M&A cost and that is NOK 11 million related to the acquisition of AMM that we did in Italy in 2021. In the opening balance, there was an error made where we included receivables or doubtful receivables, which were basically unrecoverable. And this has been a case ongoing in the court system for several years, and we believe it's prudent to recognize this as lost. Due to the error made in the opening balance, we have recognized this as M&A cost in the quarter due to the nature of it. So that is included. Underlying M&A cost is then below NOK 2 million -- NOK 2.5 million and is sort of on a normal level related to closed acquisitions and also ongoing processes.

Fourth question from Kristian is, how do you expect the operator price increase in Italy to impact Q4 versus Q3?

[Thomas Berge, executive]

I would hope that we are able to achieve a better result than the worst-case scenario. So if that is the case, then the accruals that we did in the third quarter will be rolled back. The decision is going to be taken, or we expect the decision is going to be taken in Q4.

[Morten Edvardsen, executive]

We have some questions from Oystein Lodgaard in ABG. From which date will Reach Data be consolidated?

We closed that into October. So, we will consolidate from the P&L from November 1. So, there will be 2 months impact to the P&L in the fourth quarter related to Reach Data.

Second one is how much synergies are you typically able to extract when you do bolt-on M&A? And what about level of acquisitions?

[Thomas Berge, executive]

There is not a standard answer on synergies. It depends on the target and which country it's located. Normally, we see over time that there is a significant synergy potential if we do an acquisition in a country where we have a substantial footprint. If we go into new countries, then the synergy potential is less. Level-up acquisitions, if that happens in an existing country where there's a strong overlap with resources, the synergy potential is normally quite big. If it is a level up acquisition outside our footprint, then the synergy potential on the OpEx side and the COGS side is less. But of course, we still have the potential of doing upselling activities and exporting LINK products to the acquired entity.

[Morten Edvardsen, executive]

And the last question from Oystein. Do you see potential to do level-up acquisitions in Europe? Or is that mostly outside Europe?

[Thomas Berge, executive]

Both. We do see some level-up opportunities within Europe, and we have some outside also. So the answer is both.

[Morten Edvardsen, executive]

And we have a question from [ Mads Indigo ], [ Rosendal ]. Could you elaborate some of the main reasons for sacrificing revenue growth from aggregators, as this is the main cause for deviation on your result compared to consensus?

[Thomas Berge, executive]

It's a deviation on revenue, not on gross profit. Our first priority is growing gross profit. Revenue is easy to grow. But we emphasize gross profit growth. This is why we also said to the market that we expect a high single-digit gross profit growth. We haven't said anything about revenue growth. The main reason for this, it doesn't make sense for us to have this exposure based on profitability and the credit risk on the clients that we've decided to decommission. So, this makes sense for us to do from a business perspective.

[Morten Edvardsen, executive]

And the second question is, why not use the recent strong credit markets to fully refinance the 2025 bond because 2025 seems fraught with uncertainty?

I think I can cover that. We wanted to -- we had a large sort of due on the initial bond of EUR 270 million next year, and we wanted to sort of restructure the debt maturity profile. So, we chose to refinance part of it now. And we think that sort of we are -- we expect to refinance a lower total debt level. So we see the remaining -- we don't see the big risk on refinancing the remaining part that we will do in 2025.

[Thomas Berge, executive]

Just a comment from me also regarding the last question. 2025 seems fraught with uncertainty. I'm not sure in which context that was referring to. But when we look at 2025 on the business of LINK at least, we don't see any more uncertainty than we are having in 2024. So, we continue to be optimistic for the future in 2025, and we expect it to be fairly similar to what we have seen in 2024. There's no reason to -- based on the signals we are getting from the market now, to expect a material difference here.

[Morten Edvardsen, executive]

The next one is your usual multiples on the cash EBITDA in your M&A pipeline implies several billion NOK in M&A outflow. Will it be possible to still maintain 2.5x leverage? Or could you go over temporarily?

[Thomas Berge, executive]

No, we're not going to go over 2.5 in leverage before we have done the complete refinancing of the bond. I guess it's normal then to come up with a revised leverage estimate. And you're also right, we have a very extensive M&A pipeline. And if you summarize sort of the expected purchase price on the complete pipeline, that's a lot of money and we don't have the financing for all of that. This is also why we're working on the pipeline on a prioritized basis. We are picking off the targets that we feel have the best match with LINK. So, we prioritize acquiring the better entities first.

[Morten Edvardsen, executive]

And there are some follow-up questions from Petter Kongslie in Sparebanken. With initial user experience not yet on par with Android, he is referring to Apple. And what do you mean by this?

[Thomas Berge, executive]

On iOS, 18.1 RCS was launched in the SMS app. This is the first version from Apple. And the look and feel, this is what I mean, isn't the same. And the features, they are matching with the carousels and the possibility to add pictures and buttons and so on. But the way this is looking right now, there is an improvement that we can do there compared to iOS or what we are seeing on the iPhones compared to the Android terminals. So, we do expect Apple to sort of -- there are no big things, and this is probably going to be cleared out within 3 months to 6 months.

[Morten Edvardsen, executive]

Next one is, who is the largest competitor in Portugal, given that LINK is at 15% with the acquisition?

[Thomas Berge, executive]

Go4Mobility and [ iGo ].

[Morten Edvardsen, executive]

And the last one on working capital. Why do you expect working capital to over time be neutral? As far as we can see from the historical figures, you have operated with negative working capital source of fund, has something changed?

Nothing has changed. This will -- we expect it to be neutral over time. We see that the variance in working capital varies across the footprint as well. Usually, historically in the Nordics, it has been negative. In some of the more Western countries, that is not the same case. So it's also about sort of the footprint and where we do an M&A and where we sort of grow the most. So it's our perspective as well as prudent perspective here it's fairly neutral over time.

And then we have some questions from [ Tobias Sinding ]. Just don't think we need to -- could you help adding some color to how EZ4U and NRS are performing and their integration so far?

[Thomas Berge, executive]

NRS and EZ4U are performing just fine and in accordance with what we've seen historically. So, we're happy with the current performance. Right now, we are doing a 100-day plan for NRS, where we're integrating NRS into LINK more soft, and then we will work together with our local team and the team in NRS to figure out the next phase on how to integrate the technical side. We are planning to keep the NRS platform. It's a good platform, and we want to utilize that as another self-sign-on platform in Spain.

[Morten Edvardsen, executive]

How are you thinking about gross and adjusted EBITDA margin developing into 2025 with increased CPaaS backlog?

[Thomas Berge, executive]

Maybe that's a question for you.

[Morten Edvardsen, executive]

Yes. I think we see as CPaaS starting to sort of mature and the contracts are being implemented, they are usually at an average higher margin. It's, of course, starting from a low base. So, we expect it to have a positive impact going forward, but it will take time to implement and it will gradually sort of improve and support the margin level. That's our perspective on it going forward.

EBITDA margins, we expect -- usually, we are pretty prudent when it comes to rolling out the more advanced solutions. So, what we said is typically for marketing automation, we might need some different sales capacity, but that's being rolled out very gradually. So it's not like a big bang on the OpEx side related to new sales resource and that. So it should still maintain the overall ambition of growing adjusted EBITDA more than we grow the gross profit.

I think that are -- we covered most of the questions. Yes, we have a couple of questions from [ Daniel Pederson ]. Whether you can give an update on the credit risk policy and how much credit risk you can carry in your net working capital?

I think on the credit risk, that is an ongoing assessment like for Global Messaging, where we continuously monitor the sort of payment behavior and similar also for enterprise. So there is -- we start usually giving a low credit limit on new clients and then that expands as we see the sort of payment -- the following payment dates and sort of expand their total credit limit. So it's basically a per customer evaluation that we do. So, that has -- that's basically the policy that we have. There's no change to that. It's just more specifically we evaluate some of the clients in Global Messaging over the last months.

Who is the regulator that will decide on the pricing in Italy?

[Thomas Berge, executive]

It's the telco regulator in Italy. I wouldn't expect the telco regulator to be the one who takes the decision in the end. I think the mobile operator understands it better to reach an agreement with us than to leave this in the hand of the telco operator. So, there is a bilateral negotiations between us and the Italian mobile operator also.

[Morten Edvardsen, executive]

Perhaps a follow-up from -- or a question from Oliver in Carnegie. Do you see the Q3 CapEx as a run-rate level?

Q3 was elevated due to especially the higher tangible level and some additional external costs, which we don't expect to see going forward. It will be probably a little bit higher than we've seen in the previous 2 quarters as we are doing some more additional investments in some of the areas I mentioned, but not to the same extent as in the third quarter.

Then there is another question from [ Jon Andersen ]. To what degree are you able to invest in your sales force to increase organic growth given that you often mentioned good upsell potential with your 50,000 customers?

[Thomas Berge, executive]

That's a good question. It's always difficult, of course, to find new sales reps that has a satisfactory performance. The sales reps need to understand the market. They need to understand the products and how the products are used from a technical side and also from a customer side. So, adding more people to your sales reps that needs to be done slowly if you want to take -- if you want sort of to maximize the probability of achieving the results that you want to do. But we're doing a lot to work with the existing sales force to get them to perform better. There, we see a lot of opportunity still going forward. That's something we started back in 2022. And we're working now on new initiatives for 2024, 2025 to further increase the performance of the existing sales force.

[Morten Edvardsen, executive]

I think that was the last question we have time for. Thank you for participating this morning. See you again next quarter.