Sinch AB (publ)

STO:SINCH

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Sinch interim report, January to March 2020. [Operator Instructions] For your information, this conference is being recorded today. Now I would like to hand the conference over to your speaker today, Thomas Heath, Head of Investor Relations and Chief Strategy Officer. Please go ahead, sir.

[Thomas Heath]

Thank you very much, operator, and good morning, and welcome, everyone, to this conference call with Sinch AB to discuss our results for the first quarter, Q1 2020. With me today from different locations are our CEO, Oscar Werner; and our CFO, Roshan Saldanha. And with those opening remarks, I'll hand the word over to Oscar.

[Oscar Werner, Chief Executive Officer]

Thank you, Thomas. So welcome, everybody, to this Q1 report. We're very happy to present a strong quarter this quarter. And we will go through the details in the following slides. So if we can have Slide 2, please. So this overview, you have seen many times, if you have followed us. We have updated the revenue in the last 12 months to SEK 5.6 billion and the adjusted EBITDA in the past 12 months to SEK 646 million. And we have also grown a little bit in number of people in this quarter to 766. And the remainder of the slide is the same. I mean we continue on our main business, of course, through customer engagement through mobile technology in messaging, voice and a little bit on video. And we're doing 40 billion transactions, 40 billion engagements per year, and we're providing cloud communications services for messaging, voice and video. With that said, I think we can go on to the next slide, please. So this is now Slide #3. And we are in unprecedented times and unchartered territory. And I think it's hard for any business leader in this time to know exactly how the future will look. And in Sinch, we have put a strong program in place in order to have flexibility to handle this. And we have put a strong program in place. It's everything from employees working from home, of course. We have also done a lot of customer communications around this. We set up a COVID-19 Knowledge Center on our website. And we have put a strong contingency plan in place, where we are considerably more conservative on OpEx investments now in these times. And the reason for that is simple. It's -- no models can really take in and how do we project for this. It's obviously harder -- it's harder for any company and we're not -- we're, of course, included in that. So in such times, we take a more conservative approach on OpEx and a more conservative approach to leverage in general. We have also -- also we have done, and it's good to know, we've also done an anti-smishing initiative in the U.K. We see in our industry, there are companies and competitors using grey routes or routes that are bypassing operators in order to send text messages to consumers, which do not send them by operators. And we have, together with MEF in the U.K., done an anti-smishing initiative. And that we have, of course, signed up to this. We're a good player in the industry. And we're happy to see that most of our competitors have signed up, even though all have not done yet, which is surprising to us. And we'll discuss the financial impact of COVID later -- COVID-19 in the later of the presentation. So if we move on to Slide 4, please. As you will have seen that we have completed a directed new share issue of SEK 1.5 billion, when we announced the acquisition of Wavy on 26th of March. And we want to extend a thank you because we're incredibly grateful to our owners for being willing to support our strategy in these very uncertain times. So a huge thank you to our owners for supporting our strategy there. I also discussed this with our Chairman yesterday, and we concluded that supportive owners is a true success factors for Sinch. And he wanted to personally extend a thanks to you as well for your strong support. So if we could go to next slide, please, Slide 5. So we had a strong growth in Q1. We had 54% growth in gross profit and 64% growth in EBITDA. And this is coming both from organic and M&A-driven activities. And of course, we focus on gross profit and not revenue since we have a large share of pass-through revenue. And we're happy to report a track record of profitable growth quarter-over-quarter in the last quarters. So if we can go to the next slide, Slide 6, please. This growth is obviously now, to a large extent, driven by we're in a positive market. The cloud communications market is a positive market, both in our main segment, Messaging, which is a $17 billion market on the A2P SMS market alone. And we're now seeing growing impact on the next-generation messaging, where we have 50% to 100% -- or in the markets above 100% growth rates in that segment. And we also see a strong growth in the CPaaS segment of the more value-added services on top of the actual connectivity or sending messages or connecting the voice calls. So this is a strong market, which is obviously very beneficial for us as one of the market leaders. If we go to the next slide, please. We have Slide 7 now. We are focusing on both the connectivity side in voice and video and in messaging and connecting people to make it possible to transmit messages and play voice call. And so that's our biggest segment. And we're focused on that. And we're also now focused on building a higher value-added Software-as-a-Service services on top of transmitting the message or connecting the phone call. We're also adding a large number of services on top, where we believe we can charge more to our customers for higher value-added services. If we go to the next slide, please, Slide 8. We have been active on the M&A agenda. We have done 2 lately. It's Chatlayer, which is on the conversational AI side; and Wavy, which is both on the scale and profitability and on the technology and go-to-market. And the reason for that is simple. I mean they have an innovative business unit, who are providing CPaaS services and SaaS services, which we placed in the technology and go-to-market sector. And we have -- they have a large messaging business, which are placed in the scale and profitability area. If we go on to the next slide, we have included the deal rationale in this deck for your reference. We do not intend to go over it here. We think we have gone over it before. And therefore, we will skip those slides in interest of time. But we included them in the presentation for your reference. To remind, on Slide 10, what is Chatlayer. So Chatlayer is an AI-based service, where you can basically automate, understand the human intent of the incoming messages and automate the response. So if you think about the connectivity business in messaging or voice, that is actually us submitting the message or connecting the phone call. But there, we don't -- typically don't do much on the -- in a pure self-service, we don't do much to the content of the message. That is up to the customer to create. But with the Chatlayer, we would interpret what is -- for our customers, of course, automatically interpret what is the intent of the incoming message that is coming from the consumer into the enterprise. And we would tell the enterprise, "All right, this -- the intent of the user or this user's intent is to book a ticket. This user's intent is to know about the insurance claim or something like that." And for a company, you can see the difference between the leftmost picture, which is a scripted dialogue, where our customer, in this case, represented by KD Insurance, would need to say to a user, "Hey, welcome to KD Insurance. What you want to talk about? What's your option?" And they would have 1, 2, 3, 4 number of options. And the user here is interested in the nearest office, as you see, which is not one of the main options. And if the user types that into KD Insurance and KD Insurance doesn't understand what the user is saying, so it responds whether you have typed incorrect response, try again. And then the user is typing 0 and you get to the main menu while the user thinks it takes too long time and therefore give up. And you can contrast that to this type of service we can do with Chatlayer's technology and AI technology and NLP, which is basically, "Welcome to KD Insurance." The user would type in, "Where is the nearest office?" And the Chatlayer's technology will interpret that and understand what the user means. And therefore, ask you, "What city are you in," if you're not using any implication-based services. And when the user is answering Liverpool, we understand or our customer understands the question and can therefore, respond by the correct answer. So as you can understand for a messaging business handling 40 billion transactions, this is a very strong value-add to our services. Next slide, please, is the deal rationale of Wavy. We have gone over though enough in the specific calls for Wavy, I will jump that as well. And if we then go to Slide 12, please. This is an example of Wavy's innovation business, which is pretty much in line here with the Chatlayer. And that is why when they're doing it, the customer care for a company called Ingresso Rápido, and Ingresso Rápido is a ticketing sales and event management company. Where Ingresso Rápido has a large number of incoming calls to their contact centers, and it's complex to scale support teams with maintained quality, and Wavy has provided a service to them, where 82% of the tickets are answered automatically by a bot. So it doesn't need to go to an agent in the call center. And they have 70% satisfied users by the bot answers, so very high satisfaction rate on the answers since the users is getting the response earlier. And they can -- they -- we have seen that Ingresso Rápido can have a 45% cost reduction in their call center or contact center due to automating a lot of these incoming requests. And this is also a very, very powerful case, of course, in the innovation business or new tech or CPaaS business of Wavy. All right. Next slide, please. So going into January to March. So we saw gross profit rising 54% to SEK 446.7 million. Adjusted EBITDA was rising, not 64 -- not 82%, but 64%, so there's been an error on this slide, to SEK 184.3 million. And adjusted EBIT, excluding acquisition-related amortization, to SEK 168.8 million compared with SEK 102.3 million. Profit after tax was SEK 96.4 million. And the difference between profit after tax is the -- we have -- what we're doing write-downs of the big amortization related -- of the values coming in, in the acquisitions. And that's why you have a big difference between the adjusted EBITDA and the profit, which is not really translating into cash flow, of course. So cash flow is much closer to EBITDA. Organic gross profit growth was 42% in local currencies. So we see a strong organic gross profit growth in this quarter. We do have a significant local -- or FX effect in this quarter, which I want to point you to. And we obviously have a positive impact of the TWW and myElefant acquisitions. And COVID-19 is causing reduced voice traffic, as we've communicated before. And we can see that in the later part of the presentation. It is also -- we're also seeing a negative impact in certain segments of marketing due to COVID-19. Especially, of course, from the retail segment, you have a negative impact. Then you have a short-term positive impact on the Messaging segment as well, which we didn't fully expect. But that is companies communicating more to their employees and to consumers as a precautionary effect during COVID-19. This is everything actually from health care providers, we see major health care systems around the globe using our messaging service and then having increased communication. And we see a one-off effect even from airlines. In the early parts of the crisis, their volumes were going up because they have an increased conversation. And then later, it's going down. So we're having a positive short-term effect here on COVID-19 as well in March specifically, which we're going to see a little bit when we look at March figures on volumes. And our high scalability means that the EBITDA and adjusted EBITDA grows faster than gross profit, despite us being able to handle -- getting larger volumes. And you can really see that, large volumes become a big spike. We don't need to have a lot of -- much OpEx. And it -- obviously, it drives a lot of EBITDA as a result. So next slide, Slide 14, please. The key growth drivers in this quarter is continued growth on volume but also on new use cases, which we're very happy to see with U.S. big tech companies being able to translate the messaging business into new use cases and new demands with our biggest customers is obviously very strong. The acquisition of TWW and myElefant, and especially on TWW when we think about EBITDA, it's a big driver. And we also see the Operator business, which coming back to strong profitability this quarter as a result of project completions and large customers having higher volumes. So that's the 3 main growth drivers to this -- in this area. As you see, the Voice and Video segment, we have taken off for this area due to the COVID-19 impact. So despite strong underlying growth, we see weaker growth in that segment for this quarter. If we go to next slide, Slide 15, we have 4 investment areas. And we adjusted this slide a little bit to the integration efforts, given the number of M&A we have -- M&A transactions we've done. So we're investing in organic growth, of course, so continued investment in platform scalability, supporting existing customers and new -- focus on new sales and broadening our base. It's a big area of investment for us. Operational efficiency coming through COGS efficiency and automation for improved scalability is another big area. And new technology is the third. I mean software for advanced, interactive messaging, new channels, like WhatsApp and RCS and RCS-as-a-Service for operators. We're also happy to announce in this quarter that we're participating on SMSF for 5G, together with Ericsson. So providing operators around the globe with an ability to have SMS in 5G is a strong new development. And integration-wise, we are -- we have scaled up our -- or our acquisition efforts, as you have seen. And on that comes integration-related OpEx, which we -- if it's true integration-related OpEx, we will -- that will go away and we will classify it as extraordinary items. But we are scaling up our integration efforts, of course, on the back of acquisitions. So if we go on to Slide 16, please. So you're seeing on Messaging, if you look at the segments -- business segments a little bit, we can look at Messaging, our largest segment. You are seeing increased volumes driven by U.S. tech companies continue to fuel growth. We're seeing also a shift in the enterprise base. I mean businesses shifting from e-mail to mobile messaging for portions of their customer communication. This was a trend that has been ongoing for the last 20 years and we see that trend going on and even being stronger and stronger as we see a strong impact there. myElefant and TWW are included since mid-October 2019, which obviously impacted Messaging. And we are investing more in next-generation messaging, which is obviously impacting more on the OpEx side. And we're seeing revenue, but compared to the largest segment, it's obviously on a small scale. If we go on to Slide 17, we see the message volume development in the last quarters here. And as you can see, there's a big hike-up in Q4 and also a spike-up in Q1 and especially in March. So the late 2019 is the TWW and myElefant acquisitions, October-November '19, see the jump from the curve there and then see significant volume increase in March 2020, and of which part of is likely to be related to COVID-19 and part of being a one-off effect, we believe. It is obviously -- there's billions of messages and thousands of customers, so it's hard for us to know exactly. But we do see a significant spike, especially in March, which we didn't expect, to be honest, on short-term effect, which will not be there going forward, coming from these spikes of increased communication. But it's also growth from existing customers, both new customers and new use cases, and we're very, very happy to report a 60% growth in transactions and a 64% growth in gross profit, so very strong development. We need to monitor this trend going forward. But we were also a little bit surprised on the very strong March number, of course. Going on to the next slide, Slide 18. This is gross profit per transaction and OpEx per transaction. And we're monitoring gross profit as the primary bottom line driver, apart from OpEx, of course. Gross profit per transaction declined due to traffic mix. Sending these amount of volumes when the mix changes to low gross profit per transaction countries, it has an impact. And we've seen that this quarter. And the inclusion of TWW's high number of transactions, but a lower -- and very good EBITDA but a lower gross profit per transaction is the market structure in Brazil. And therefore, it impacts our total gross profit per transaction, which is planned and it has a great EBITDA impact, but you should also see that. And you also see an OpEx per transaction increase due to the seasonal OpEx pattern. Partly, it's, of course, when message volume goes up, then OpEx per transaction goes down. But it's also seasonal OpEx pattern. And obviously, TWW has an impact here as well due to being a very profitable company, a strong company with low OpEx, which is a high increasing number of messages. On total, the balance then on OpEx per transaction goes down. But the most important thing to us is that these 2 lines are following each other. So the difference, which is obviously the -- our profit is increasing or being maintained. And we see that in this quarter. So both currently going down is obviously planned and especially due to TWW transaction. So if we go to the next slide, Slide 19, please. We see a stable margin for the Messaging. So we're measuring Messaging EBITDA over gross profit as a measure of our scalability. And we want to make sure that this line is stable at 45% and even up to 50% in some months. That means that we're in balance with our gross profit growth and our OpEx investments, and we want to keep that balance. But that's been what we communicated before that keeping this line in balance and then continuing to drop almost half of every gross profit dollar down to EBITDA, that's our -- how we steer the company. Yes, we've talked about this slide a number of times. So I -- for those of you who have been on the calls before, you understand it. And we see a stable development on this slide or on this trend, which is one of our key measures. And we believe this is really truly showing the scalability, being able to drop, for example, the gross profit down to EBITDA is a very strong metric for any business. Then looking at COVID or at Voice and Video. And here, you see the COVID-19 impact. We have said that roughly 50% of our gross profit here is attributable to the ride-hailing segment. As you can all imagine, the ride-hailing segment is down, especially in the lockdown countries. It's also fueled by its 2 segments. It's Verification and Number Masking, and Number Masking being most to the ride-hailing segments and Verification being most to log-ins to big customers. So when you get a text message or a voice call, when you log in and want to verify that your number is your number, that's the Verification business. And that business is obviously still strong. But ride-hailing is driving this drop down. And I want to also highlight that the impact here is only on March, the COVID-19 impact is not the full quarter, it's only on March. But still you see a significant impact. So the total impact in a quarter where you have a full corona effect is likely going to be larger than what you see here. This, we have communicated before in various communications, so this -- I hope this comes as no surprise to you. Looking at next slide, Slide 21. On the Operator side, we're happy to report a return to profitability on the Operator segment. This is fluctuations in results as projects are realized, of course. And we had some previously delayed projects who are -- that are successfully completed in Q1. So there, you see the flip in EBITDA between the quarters. We're also very happy to see the investments or the deal with 5G SMSF together with Ericsson. And we're making investments in these quarters on that, which we believe is going to drive good revenue going forward. And we're investing in the RCS-as-a-Service to mobile operators as we see that as a strong potential for the future, which is obviously weighing on OpEx in this quarter as well. With that said, I want to leave over to Roshan Saldanha for a little bit deeper on the Q1 financials. So if you show Slide #22, please. Roshan?

[Roshan Saldanha, Chief Financial Officer]

Yes. Hi, good morning. Thank you, Oscar. Good morning to all of you on this call and on the webcast. Please turn to Page 23, which shows the income statement. Consolidated net sales grew by 48% in the quarter to SEK 1.6 billion. The growth rate in the quarter was positively affected by the movement of the Swedish kronor, primarily against our invoicing currencies of euro, pound and dollar. And the organic growth in net sales was at 32%. EBIT came in at SEK 119 million versus SEK 69 million the same quarter last year. And acquisition-related amortization, which does not affect cash flow, was SEK 41 million versus SEK 33 million the last year. This amortization relates mainly to planned amortization of acquired brand, the customer-operator relationships as well as software and does not affect cash flow. So adjusted EBIT, which we believe is the better measure, amounted to SEK 169 million versus SEK 102 million last year same quarter. Turning to Slide 24, which shows a bridge explaining our underlying gross profit development. A significant part of our revenues are passed on as cost of goods sold to mobile operators. We pay them to send messages and take calls, but the rates can vary greatly between markets. Hence, we almost exclusively focus on gross profit when we assess and steer our business. Consolidated gross profit rose by 54% during the quarter to SEK 447 million versus SEK 289 million the last year, out of which foreign exchange contributed around SEK 11 million or 4% of that growth and acquisitions contributed 15% of that growth. I think here, it's worth to mention also that we see that the more marketing-related sort of part of our business is also affected by the pandemic. And that is across markets and across businesses. But myElefant, being a recent acquisition, has a share of marketing-related traffic and then that is affecting growth, although that effect came only partly in Q1 and will be reflected more in Q2. Looking more at the organic growth then. Organic growth was 42% in the Messaging segment, 18% from a small base in the Voice and Video segment. And as Oscar commented earlier, do consider that the ride-hailing segment within Voice and Video, the ride-hailing customer segment within Voice and Video is significantly affected by the lockdown restrictions in the pandemic. And that is only reflected for 1 quarter -- or for 1 month, you could say pretty much this quarter or even less, whereas in coming quarters, it will be a full quarter effect. Organic growth in the Operator segment was 13%. But that can vary from quarter-to-quarter as projects are realized. In Messaging, the organic growth is coming from volume growth. Some of it may be short term. We already see that the spike that we have seen in volumes during March tends to normalize in the first few weeks in April, and we expect that some part of that spike at least that we saw in Q1 is not a lasting spike in the medium term. Of course, we also see new use cases, which we are very excited about from our largest customers, and that's contributing growth as well during the first quarter. Oscar talked earlier about the investments that we are making for continued growth and highlighted the main areas of growth being driving organic growth, internal operational efficiency and quality as well as investment in new technology. Please turn to Page 25 to see a summary of the number of resources at Sinch. Our headcount is distributed in many different locations across the group. But the globe -- but the majority of our resources are in Sweden with U.S.A., Poland and U.K. being other locations with significant concentration of resources. We have grown headcount at the company with 50% during the previous 12 months. As stated earlier, I mean we're being cautious going forward and reducing our rate of investments due to the increased economic uncertainty. But obviously, the growth rate in Q1 is reflecting more the new signings of employees that we have done maybe in the weeks or months prior. And hence, the growth in Q1 is still at the same levels as the growth in Q4 at around 40 people per quarter. But that might reduce during Q2, depending on what actions we take. Yes. Turning to Page 26 then, which is a statement of -- showing the reconciliation between adjusted EBITDA to cash flow before changes in working capital. A very, very strong quarter here with 94% development on the conversion of adjusted EBITDA to cash flow before changes in working capital. And this is primarily driven, of course, by a combination of one-off effects and refunds of paid taxes, which means that paid taxes is unusually low this quarter compared to what we would normally expect it to be. Turning to Page 27 for the full cash flow statement. Cash flow from operating activities was SEK 135 million this quarter. Changes in working capital fluctuates from quarter-to-quarter because many of our customers maximize their liquidity. We can see a small number of customers requesting additional payment terms, but we still don't see that levels that affects our overall working capital development. Actual customer losses remain low at 0.05% and cash flow in relation to operating profit is slightly improving over time. And the net cash position amounted to SEK 639 million. And that is, of course, due to the share issue that we so successfully completed in Q1, thanks to the support from our investors. And that is really great to see. Finally, Slide 28, which summarizes our financial targets. The financial targets are unchanged for the company from what we have previously stated. We aim to grow adjusted EBITDA per share by 20% per year and maintain net debt below 2.5x adjusted EBITDA over time. Measured on a rolling 12-month basis, we grew adjusted EBITDA per share by 52% in Q1. And net debt-to-EBITDA was negative 1.0, down from positive 1.2 a year ago. With those comments, I'd like to hand over back to Oscar to summarize today's presentation.

[Oscar Werner, Chief Executive Officer]

Thank you, Roshan. And a small comment on the headcount increase. I don't think it was mentioned on the slide, but we obviously have the addition of TWW and myElefant on Q4 and Q1, give an extra hike in those numbers. And that's why you see the trend break going up in those quarters, so just important to realize.Future growth. We see a strong pipeline with several U.S.-based global tech companies. And this is obviously, as I said before, both with turning on traffic from new but also working deeper and deeper integrations with messaging and other use cases in the ones that we have. Mind you that the 5 largest U.S. tech companies has the same stock market value as the entire German stock market. And that's only half of the TAM, let say, and all of these are big cloud communication consumers. So it is very, very, very large companies. There are a lot of departments and a lot of opportunity if you continue to do high-quality service to them, which we so far have been able to do. We also see, I mean, the trend is still there. Enterprises shifting from mail to messaging. We're also seeing now with the 2 use cases that we showed a little bit from the contact center space shifting from voice to messaging. So we see strong trends going more to Messaging and more to the Voice segments that we have in macro. And that's continuing in this quarter. I mean I think it's a strong trend that has been there for the last years. And the reason is super simple. If you want to reach somebody fast, time-critical and get a response, then messaging is more effective than e-mail. It's as simple as that. And I think you can all go to yourself. You have much fewer unread messages -- mobile messages in inbox mail, e-mail. And that's what enterprises are seeing and therefore using this communication channels to consumers. We have a larger field sales organization and strengthened marketing. So we see increased lead gen from marketing when we up our marketing efforts and improve those, which we're very happy to see. And the larger field sales organization is resulting in an increased pipe if you compared to 12 months ago. And we're working hard obviously on driving always a larger, broad-based growth in the company. On M&A, I mean, we are -- we have an active M&A agenda in both our categories, scale and profitability and technology and go-to-market. And we do have an active agenda. We think it's -- we're very fortunate as a company to be able to make, in these times especially, large M&A transactions, which adds to our -- adds significantly to our profitability at attractive valuations while also broadening our customer base and diversifying our customer base. I think that's a very, very attractive position to be in from an M&A-wise in this type of market. And that's why we completed it the way we did. We see also continued strengthening of our connectivity offering. That's a big growth driver, just like increasing quality, increasing reach, et cetera. And increased SaaS value-add through investments in software, RCS, OTT chat apps, et cetera, are additional growth drivers on top of the top 4, obviously spanning all of the areas there. With that said, I want to thank you for your attention, and I want to leave the floor open for questions.

[Operator]

Our first questions come from the line of Ramil Koria.

[Ramil Koria, Analyst]

Few questions from my side, if I may. Just please help me understand this. So just to square everything that has been said in some numbers you provided during the day here, so marketing volumes are down, ride-hailing volumes are down. You are seeing pent-up demand in some sort of customer categories. You mentioned the health care providers and airlines. But that doesn't sound like your average sort of U.S. customer and U.S. revenues are up 16% quarter-over-quarter. I mean how much of the impact is really, put it, COVID-19-related? And I mean isn't some of the COVID-19-related -- or is the increasing demand also related to digital-native business seeing a structural change in sort of customer uptake?

[Oscar Werner, Chief Executive Officer]

That is correct, could have been clearer on the call. So we see the 2 major negatives is the ride-hailing in Voice and Video and then certain segments, I should say, marketing, especially retail being one example. There, we see negative impact. And you see it can be pretty significant on the ride-hailing segments in Voice and Video since you only see 1 month this quarter. Then we have a structural increase in the -- in certain segments like e-tail or some of the cloud communications companies like log-in to communications apps. Obviously, that's a structural change, which is likely to continue. That is 100% true. And then you have a temporary -- structural positive change and then you have a temporary positive change, which is more when you see the spikes that we suddenly saw in March, which we didn't expect of airlines being the clearest example obviously suddenly communicating a lot with the customers, but then they're going down. And then you have health care providers or even governments communicating a lot with consumers. It's very hard for us. I mean these are unprecedented times. It's very hard for us to know how much of that is actually temporary and how much is structural of that or even how much is going to continue during COVID. But we do believe a portion of it and a relatively significant portion is one-off due to the structure of the messaging, when we look a little bit more detailed. And one very simplest example there is obviously airlines. But you're 100% right on the structural increase in the communication side as well. Obviously, very hard for us and anyone to judge what's going forward. It's a large number of transactions and it's unprecedented time. So it's hard. We will have impact. But in general, we're in a good segment, of course.

[Ramil Koria, Analyst]

Perfectly clear. Just moving on to or basically tying into COVID-19 impact on the sales and marketing, I mean some of your peers are more -- I mean their unique selling point has, to some extent, been online channels. And now with physical meetings being out of the question, how has -- have you seen any impact in terms of customer intake, et cetera? You mentioned it in the call. But some flavor on that would be great.

[Oscar Werner, Chief Executive Officer]

I mean generally, I think new sales has been harder in the -- new sales has been -- contacting new customers, new leads, new prospects has been harder in these times. The existing relations you have, they typically go on. And especially on the tech side, you see some of the companies just pushing on even harder. And especially the U.S. big techs, they're pushing very hard. I mean as you've seen the recruitment plans of some of them, so that's strong. But we also see companies who actually -- I mean you can take airlines. We just got a new big RFP from a big airline, who are just saying, "Hey, we have less things to do and we're utilizing this position in order to develop new services, so we want to engage with a player here and therefore sending out an RFP in your area." So whilst others are saying, "Hey, we cut all the investments," so I think it's very relative to the strategy of the individual company as well. But generally, you can say new sales being tougher, engagement with -- existing engagements definitely going on and possible to do during these times since people have a little bit more time on their hands when they aren't traveling.

[Ramil Koria, Analyst]

And then another question on the same topic, perhaps to Roshan this time. I mean other external costs are up while exhibitions presumably are completely gone, traveling should be down. Is there anything in that sort of other external cost line item in this quarter that could be considered exceptional?

[Roshan Saldanha, Chief Financial Officer]

No. I mean I think on the other external cost, there's nothing exceptional. I think in that sense, we have sort of the conferences, such as the Mobile World Congress in Barcelona, that typically come in Q1, where you could say since we were committed and a late cancellation, we're obviously carrying some costs for it but maybe not the full cost of such conferences. So there are some minor deviations like that. But then on the overall side, I would say that maybe slightly positively affected by the coronavirus effect. But in general, no significant one-off items.

[Ramil Koria, Analyst]

And then another COVID-19-related question before I move on to other questions, a high-level one. Do you expect the general consolidation of the market to speed up now with the crisis here? Are you seeing it change behavior among potential targets, et cetera?

[Oscar Werner, Chief Executive Officer]

I'd say no significant impact. Mind you, I think on the scale and profitability side, all of these companies are highly profitable and they are in a segment that is generally good. So I don't foresee on that side a lot of like profitability and therefore increased pace. It's a general high activity but not increased. On the tech and M&A, possibly there could be targets to come into financial difficulties if you invested a lot. I don't think we have seen a significant impact in increasing activity there so far. But I think in general, there is an active or very active market in this area with a lot of opportunities in different angles.

[Ramil Koria, Analyst]

That's clear. And you added 90, 0-9 (sic) [ 9-0 ], employees and consultants in the quarter. I mean I asked this question in the Q4 call as well. But could you -- phrased somewhat differently, but could you, to some extent, sort of just elaborate a bit on how those FTEs are split between the different buckets internally? How do you divide recruitments in terms of functions?

[Roshan Saldanha, Chief Financial Officer]

Yes. I think I can maybe try to address that one, Oscar. I think, Ramil, and maybe request the operator as well at the same time, we move on to some of the other questions. If there are other questions, we can come back to Ramil sort of after this question. Hope you don't mind about that, Ramil. I think the -- on the investment side, I mean, we say that we're investing in the organic growth, we are investing in the operational efficiency and investing in new technology. And I think those where the majority of our recruitments are going into those 3 buckets. I don't think we give a split sort of in terms of how much of that goes into those buckets. But the majority of our investments are in the core business and the organic growth that we're driving. We're obviously cautious and want to see results in the new investments that we choose to make at an early stage. So we're result-driven in that sense.

[Operator]

Next questions come from the line of Predrag Savinovic.

[Predrag Savinovic, Research Analyst]

So first, one follow-up from Ramil's question. On the Messaging volumes, when looking at the distribution of external net sales, we see France down somewhat year-over-year, Germany down, U.S. grows by a lot. And one thought could be that the lockdown measures came to the U.S. in the latter part of the quarter and will hit fully in Q2 potentially. So could there be any risk of traffic volumes coming down in the U.S. from this lag effect, so to speak?

[Oscar Werner, Chief Executive Officer]

It's a very hard question to answer. I have personally not been in these times before and I think that goes for most of us. It's very hard to predict kind of what is going to happen on general. The U.S., yes, it's a little bit later than Europe in that sense. I think -- but I think we think more on this -- the impact more on the segment base than on a geography base in general. So I think we think more on, all right, the travel industry is going to be impact, the retail marketing industry is going to be impact, the e-tail marketing is probably going to increase and the big tech side with a lot of the comm services is probably going to increase. Now a lot of our U.S. volumes is obviously big tech but also a lot of the e-tail side or those type of companies being a big portion of the U.S. economy. So very hard to say. But generally, we have quite a few large segments in the U.S., which are relatively less impacted as well, would probably be my answer to the question. Then these are unprecedented times, and we don't know -- also has to be a large portion of the answers, like we didn't expect the March spike, for example. That was not something we foresee.

[Roshan Saldanha, Chief Financial Officer]

I think let me just complement what you're saying, Oscar, maybe 2 comments, Predrag, for you to take. One is, I think, reflects that the spike that we are seeing -- what we're saying is that a portion of that spike is driven by the coronavirus impact. And a portion of it is, of course, the normal sort of business growth that we have. And despite that it's coronavirus-related, maybe what we can see in April is that it is returning to more normal volumes. So it may be sort of more short-term and not long-lasting, right? The other thing, I think, when you think about sort of country distribution, I mean, the country distribution that we have in our report is based on where our customers are based and sort of originating market, so to say, of our traffic. If you look on sort of where we terminate traffic, I mean, this is really more reflecting where the population is and sort of where smartphone users are and phone users are, mobile phone users are globally, so -- and that affects, of course, our gross profit, depending on where we are terminating traffic. And it's a much more global picture than our originating view that we provided in the report.

[Predrag Savinovic, Research Analyst]

All right. Super. Great. And a question on -- I know you can't comment on rumors, but I still need to ask a question on the articles regarding SAP and Sinch yesterday in media. But to put it like this, are you familiar with the portfolio of the digital interconnect division of SAP? And do you see that they have offerings or technologies that you benefit from?

[Oscar Werner, Chief Executive Officer]

Well, obviously, you know the answer to the question. We never comment on any such rumors. Of course, you know that. If you ask the question, in general, are we -- do we know of a major player competitor in the market? Of course, we do. But we cannot give any more comments on that. But of course, we know the major players in the market, we -- yes, we know of them and all other major players in the market, yes.

[Predrag Savinovic, Research Analyst]

All right. I'll just move on to a different theme then. On the cash flow then for Q1, it looks very solid and has improved really since, I think, Q3 last year. So I guess I'll tilt my hat to Roshan here. And can you let us know the reasons for this improving trend on cash collection and what you've done here differently?

[Roshan Saldanha, Chief Financial Officer]

Yes. I think I'm gladdened to say, as you call it a trend, I'm not calling it a trend yet. But I think, obviously, I mean we work very actively with working capital. I think that, of course, is a very important thing for us and the focus across the business is really not cross-functional effort. And I think it takes time to show those working capital improvements. And probably even 2 to 3 quarters is too short to really say if that is a lasting trend. The second thing, as I said, sort of just this quarter, I mean, on paid taxes, we have some one-off effects. So that will most likely come back during the coming quarters.

[Predrag Savinovic, Research Analyst]

All right. Super. And then on COVID again, just a question here, more forward-looking. Full April is almost in the books. Can you say anything about the trends in Messaging for this month? Any flavor? I know you don't give guidance. But anything you can mention here in April, so forth.

[Oscar Werner, Chief Executive Officer]

Roshan, do you want to take that?

[Roshan Saldanha, Chief Financial Officer]

Yes. I think Ramil, I mean -- sorry, Predrag, I think the comment that we made on sort of -- on April volumes, so what we can look at Messaging volumes and Voice and Video volumes quite following what we -- on the Messaging side, coming back to more normal volumes and not seeing the spike, maybe the extraordinary spike that we saw in March, and then on the Voice and Video side, where sort of the volumes now continue to follow what we saw in the beginning -- in the end of March, when the lockdown restrictions were first placed in many markets around the world, I think that's sort of what we can comment so far. I think you should also consider that temporary spikes are maybe not as gross profit-contributing as long-term traffic trends. So I think that's one thing to consider, I mean -- and then that's reflected in our gross profit per transaction growth that we're showing in the report -- in the presentation.

[Predrag Savinovic, Research Analyst]

Super. And just one final before moving on, considering that Wavy will not consolidate until earliest H2 this year, probably towards the end, your integration processes here or this integration backlog is not going to start until then. So could you see yourself acquiring something before the consolidation process starts? Would you be prepared?

[Roshan Saldanha, Chief Financial Officer]

Yes. I mean as -- I mean as we always say, we have an active M&A agenda and we're continuously evaluating targets. I think more than that, I think we don't comment on specific M&A timing. So thinking that's where we are. Yes. And we're happy to continue a bit longer if there are more questions, operator. [Operator Instructions]

[Operator]

Next questions come from the line of Fredrik Lithell.

[Fredrik Lithell, Senior Analyst]

If I could just have then two questions on the Operator division. If you could sort of describe a little bit more on the SMSF and the business model between you and Ericsson, how that will work going forward and how we should sort of see it in the Operator division going forward. And then on the Q1 figures in the Operator division, was the sort of the little bit better trend you saw there, was that a sort of a capacity upgrade? We've seen other suppliers of equipment to telecom operators see capacity upgrades in the quarter. Is that something you had there? Or was this sort of a new contract that you had been negotiating for some time?

[Oscar Werner, Chief Executive Officer]

So the first one, Thomas, do you want to take that or Roshan? Or should I?

[Thomas Heath]

I can start and Roshan can fill in. I think, generally speaking, in the Operator segment, we have -- most of our business is product-related and on time and, when it's completed at some stage, were invoiced and paid. So there is a certain volatility or lumpiness due to that. I think the reference I recognized from telecom vendors, understand that you have a license key to unlock software. We do have those elements. We've had those historically. I believe this is not a project of that sort, perhaps Roshan can elaborate.

[Roshan Saldanha, Chief Financial Officer]

Yes. Fredrik, on your first question, I mean we have a long history of delivering SMSC software to mobile operators, both in partnership with Ericsson and outside. And what happens in the 5G world, of course, is that you need a machine that can sort of connect the old SMSCs from previous generations to new generation traffic. And this is exactly what we are -- what we have developed or are developing and will be -- are very excited to partner with Ericsson to deliver to their customers. The typical model will be a typical software model, where we're delivering a software product with upfront revenues and then a smaller sort of percentage of maintenance revenue going forward. So that's not different from our other operator software deliveries. When it comes to the spike that you saw in Q1, obviously, this is a contract that we've had for a while. And under that contract, we had a project that we actually expected should be delivered in Q4. It wasn't delivered and so we didn't book revenues for it. And we're happy to have concluded that in Q1 and hence with revenues with it. So it's a bit of a sort of timing difference really. But as we've always said in the Operator segment, I think that's to expect that there will be such time, for instance, from time to time.

[Operator]

There are no more questions on the line. Please continue.

[Thomas Heath]

Thank you. I believe the questions on the conference call have all been -- on the webcast have all been covered. So I want to thank all the participants for dialing in and passing back to Oscar for a final word or two.

[Oscar Werner, Chief Executive Officer]

Yes. Thank you, Thomas. Yes. So we're obviously very, very happy to report a strong result in these unprecedented times. And we hope to continue to deliver good results, even though as we always done, we need to be conservative, and it's very hard to project for us. And I understand it's hard for you as well. But so far, we're super happy for the result so far, and we keep on working very, very hard to continue to deliver in the future as well. So thank you all for your time on this call. And thank you.

[Operator]

This concludes the conference for today. Thank you for participating. You may all disconnect.