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Good day, and welcome to the CLX Communications AB First Quarter Report, January to March 2018 Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Thomas Heath, Chief Strategy Officer and Head of Investor Relations. Please go ahead, sir.
Thank you, operator, and warmly welcome everyone to the first quarter earnings call with CLX Communications. My name is Thomas Heath. I'm the newly appointed Chief Strategy Officer and Head of Investor Relations.With me in the room is our President and CEO, Johan Hedberg, together with our Chief Financial Officer, Odd Bolin. And with those introductory remarks, I leave the floor over to Johan.
Thank you, Thomas, and welcome to the Q1 report for CLX Communications. So some highlights from the quarter -- first quarter. We put a lot of effort in this quarter to restructure our Enterprise sales team, and I'm glad that we're delivering 16% organic growth in the quarter, and as part of this initiative, we've also hired an APAC Regional Director to strengthen our APAC sales teams.2017, we established a lot of relationships with many of the U.S. global digital media companies. Also the 10 biggest tech companies, we have signed 8 to date. Recently had a successful launch of one of the key customers that we signed and positive outlook for further launches in Q2 and Q3.We took major steps toward complete migration of customers onto our new platform, Nova. All non-U.S. customers have migrated today, and we are on time to migrate the remaining part of the customers in end of Q2.It was a slightly disappointing quarter for the Operator Division. We had low conversion from pipeline to order and sales, the pipeline though remains strong. And we concluded the acquisitions of Unwire and Vehicle. Then the next slide.So talk a little bit about the Unwire acquisition. Unwire is based out of Denmark in Copenhagen, strengthening our position in the Nordics and especially in the bank and finance sector. As a positive contribution to our margins, we will integrate Unwire through a phased integration approach to safeguard our organic performance. And this is an acquisition in line with consolidate the market and build further scale to CLX.Next slide, please. Talk a little bit more about the Vehicle acquisition that we also concluded in Q1. Vehicle is based out of Seattle in the U.S. and that is to strengthen our position in next-generation messaging services like RCS. It's a personalized video messaging platform with a strong U.S. customer base, large brands. We see a good cross-sell potential to CLX Enterprise space, especially in the U.S., but also to mobile operators in the rest of the world.Next slide, please. We continue to invest in our voice and real-time video solutions on the back of good demand from especially the ride-sharing segment across the globe. We are live in many markets and continue to roll out into more countries across the globe. We also continue to broaden our customer base from this particular segment.And with that, I'm handing over to Odd Bolin, our CFO, to detail more -- more details on the numbers.
Thank you, Johan. Good morning, everybody. Let's start with just going through the numbers briefly. Gross profit increased to SEK 200 million from SEK 198 million at last -- first quarter last year. We had an EBITDA of SEK 53 million, which was a decrease compared to last year, but adjusted EBITDA was SEK 65 million. Our EBIT was SEK 20 million and the net profit was SEK 9 million.As Johan pointed out, we are disappointed with the Operator Division this quarter. We had a slower-than-expected conversion of sales to revenue. We had had some increasing OpEx in the Enterprise Division due to the finalizing of the Nova development project and the customer migration, but we are in parallel with this redirecting our efforts and our focus towards organic growth, where we have seen some initial uptick at this point.Sinch is developing according to plan. Next slide, please.Looking a little bit more into the details of Enterprise. We had a flat EBITDA versus the same quarter last year and very strong customer pipeline, in particular, with some U.S.-based global enterprises. We've had an increase in OpEx during the quarter, as I mentioned, just recently and primarily due to this finalization of the Nova platform project and the customer migration that goes through that, we expect OpEx to stay flat or increase a little bit during the second quarter for the same reasons. We are at the very final stage of the customer migration and that demands some extra resources in order to finalize with the right quality and on time. After the second quarter, certain qualified resources from those projects will be redirected towards developing new products and services within cloud platform as a service. The Unwire acquisition had no material impact in the first quarter. It was done, as you remember, at the 27th of March. That will contribute significantly during the rest of 2018.Next slide. The Operator Division, the underlying business is continuing to develop as planned very much, but we've had a slow conversion of sales pipeline to orders and orders to projects and projects to revenue during the winter this year, which has -- which is now causing us to -- or creating a slower -- lower revenue and profit than we had expected. And we are, obviously, not happy with this development, but we still continue to see a strong sales pipeline, and we believe that the long-term outlook for the division is unchanged.We've had no capacity expansion projects for a few quarters. We are confident we will see further capacity expansion projects going forward, but we cannot forecast when those will materialize. We continue to increase -- to invest in sales and marketing in order to grow our top line long term. We stick to our 15% EBITDA margin as a forecast for the medium term for the division.Next slide, please. Looking at Sinch, we continue to invest in increased functionality and a lot of customer-specific adoptions. Ride-sharing is developing very favorably for us and further markets are set to go live during the remainder of the year, which will have a positive impact on the development of the unit.The Vehicle is, as Johan mentioned, developing well. We see increasing revenue and very considerable interest from a number of large or very large potential customers. We continue to make rather moderate investments in Internet of Things, that way mirroring the relatively slow pace of market development. We continue to do development work for Rich Communication Services because we see a strong interest in that area, and we want to be part of that and we want to match the rate on the market expansion through our development efforts.Next slide, please. Just to repeat our internal key metrics. We are looking primarily at gross profit and adjusted EBITDA to gross profit, OpEx per transaction as key metrics. We have said this before, but it's worth reiterating, we do not consider gross margin to be a relevant measure since that is to a very high degree dependent on in which market our traffic terminates, which we can only have some influence on. Gross profit per transaction and gross profit is a more interesting measure for us. And obviously, OpEx per transaction in order to measure operational efficiency.Next slide, please. Looking at those, we see gross profit continuing to grow. The rolling 12-month figure is growing. We will -- we saw quite a bit of an uptick versus the first quarter in 2017, but needs to be emphasized here that, that was a weak quarter, and we've had some positive prioritization effects during this quarter. The positive -- the long-term outlook is, however, in our view still very positive. And we continue to see an increasing number of transactions mirroring the organic growth we have in the business.Next slide, please. Now we do see a long-term trend towards further operational efficiency due to the economies of scale that we continue to increase, but we had a little bit of damp in that development this quarter due to the increasing OpEx we reported for the Nova project and the migration project.And with that, I give the word back to Johan [indiscernible] going forward.
Thank you, Odd. So next slide. So we will talk a little bit more about next-generation Enterprise messaging and the technology that is named RCS, Rich Communication Suite. We believe that RCS has the potential to replace many applications on the phone. All U.S. carriers have now committed to launch RCS in 2018. We're also starting to see price points in the market for RCS services being launched by mobile operators, where we can reutilize our contract structure and network that we already have with the mobile operators.We hosted an event in Atlanta earlier this year. It was a great event to position CLX as the early market leader as RCS develops going forward.We launched an SMS RCS API that allows customers to fall back on SMS since there will take some time until RCS reaches full market potential. We're being compliant with all the mobile phones in the marketplace and all the mobile operators adopted the technology.Next slide, please. So we'll talk a little bit more about multimedia messages and the Vehicle acquisition that we recently made. So mobile messaging is the only channel that instantly reaches 5 billion users, reaches 100% of devices and has 98% open rate. We have a video example that we wanted to show you, but unfortunately, they don't work with this conference bridge. But mobile, I will talk about it instead. So this is an example where a U.S. mobile operator sends a 45-second multimedia content to users that signed up for their service. Video explains how the first bill will look, how the first invoice will look to avoid churn from their user base. It also uses an upsell opportunity to sell an insurance on how you protect your mobile phone from damages. This has been very successful, see reduction in churn of new subscribers and also, increasing sales from add-on products, a very successful implementation on these kinds of mobile services.We are seeing this being now launched across a large variety of different enterprises and segments in the marketplace, especially as a welcome service.And with that, we are finished with the presentation for this quarter and welcome questions from the audience.
[Operator Instructions] And our first question comes from Staffan Aberg from Carnegie.
I guess it's fair to say that your organic growth is on the right track now, but what will need to happen for you to deliver a similar organic growth -- or organic gross profit growth as your main listed peers? Is it more a function of different end market exposure or could you -- could the difference be explained by execution or your current strategy in place?
So I think the main factor for our gross margin development is terminated market for SMS messages, so where the U.S. contributes with higher gross margin than, for example, Europe. So a large exposure to the U.S. market increases the gross margin.
Okay. But let's look at gross profit then instead of the top line. So the same question, the organic growth of your gross profit, what will need to happen for you to deliver the same growth as your peers?
Can you please specify what growth levels you are referring to, we can -- our peers can be defined in different ways, right?
Okay. So look at the gross profit in Enterprise Division, it's up by SEK 20 million, but on the other hand, you had some acquisition impacting that number and, as you pointed out, it was a fairly weak quarter last year in Enterprise. So I mean, it's fair to say that you underperformed peers when it comes to organic growth. And I'm wondering what your take on that is? Is it because you have different exposures or is it that you have failed on the execution in some way?
I think that we -- with the increasing focus we have now on organic growth, we'll see a stronger growth coming out of that. Whether that's going to be in line with some still undefined peers, it's obviously not clear, but we are quite happy with what we're seeing in our pipeline and with the impact. The way forward, we'll show that we're on the right track.
All right. Adjusting for the integration acquisition cost, your operating costs were fairly high in the quarter, as you pointed out, also it was up by around SEK 5 million quarter-over-quarter. But given your cost base now will be impacted by the 2 recent acquisitions on one hand and the announced cost savings on the other, what is the reasonable underlying run rate of your OpEx going forward for the group? You mentioned the Enterprise level in the presentation, but overall, you see it trending down now given the acquisitions or how should we think about it?
Well, as I said, the -- during the second quarter in the Enterprise Division, we'll see similar or slightly higher OpEx than we had in the first quarter because we're moving from an intense phase to an even intenser phase when it comes to closing the Nova project and migration. Beyond that, we will reallocate some resources, some qualified resources into development of new services and products because we feel that, that's a necessary step to take in order to be able to fully benefit from all the opportunities we see in the market in the cloud platform as a service market. We don't see any major changes to the Operator Division. We do, as you know, strengthen our top management team this year, which obviously had some impact. And what you can expect from the acquisitions is in line what we've seen so far. We don't see any reason to expect the cost base in either of the acquisitions we have made so far to go through any major changes this year.
All right. And the final question from me. You have a financial target, of course, of delivering an adjusted EBITDA per share growth of 20%. Looking at the performance in Q1, how confident are you that you will be able to reach that for 2018?
While considering that the -- and as a target in terms of both organic and acquired growth, that we have now Unwire and Vehicle onboard, we feel we have good opportunities to achieve our targets.
[Operator Instructions] And there seems to be no further questions over the telephone at this time. So I would like to hand the call back to our speakers.
Thank you very much for listening into the CLX Communications Q1 Earnings Call. And for any of you listening in who find you have follow-up questions further during the day, just reach out and we'll answer your questions to the best of our ability. That ends the call. Thank you very much for participating.
Thank you. Ladies and gentlemen, that will conclude today's CLX Communications AB First Quarter Report, January to March 2018 Conference Call. Thank you for your participation. You may now disconnect.