Sinch AB (publ)

STO:SINCH

Earnings Call Transcript 2022-Q1

[Operator]

Good day and thank you for standing by. Welcome to the Q1 Report 2022 Conference Call. [Operator instructions].

I would now like to turn the conference over to speaker today Thomas Heath. Please go ahead.

[Thomas Heath, executive]

Thank you, very much operator. We will kick off. My name is Thomas Heath, Chief Strategy Officer and Head of Investor Relations at Sinch AB. Together with me today our CEO, Oscar Werner, our CFO, Roshan Saldanha, and our Investor Relations Director, Ola Elmeland.

We'll run through a presentation and then take questions from analysts. Please limit yourself to 2 questions at the maximum, and we'll loop you back to the end of the cube.

With those first introductory remarks and a warm welcome to everyone on the call, I'll hand the word over to our CEO, Oscar.

[Oscar Werner, executive]

Thank you, Thomas. Great to speak to you all and thank you for your interest. So welcome to this Q1 presentation from Sinch, operator can we go to Slide 2, please.

So we had a SEK 19.4 billion net sales in the past 12 months and adjusted EBITDA of SEK 1.8 billion, 4,000 people write about truly now in this quarters being positioned as one of the absolute top global leaders in the cloud communications and mobile customer engagements. I think that's a very strong position in a very large market and we're extremely happy to have [gotten] there. We have over 150,000 paying customers. We have a scalable cloud communication platform for messaging, e-mail, voice and video. We do more than 600 billion engagements per year. And we serve successfully 8 of the 10 of the largest U.S. tech companies.

Fascinating thing with this market 100% consumer penetration there is no person on the planet that you can meet on the other population -- or population that I know well, that is not in any way shape or form user of these services. Of course there are but it's a very, very small percentage point. And this is a growing multibillion dollar U.S. market that's probably a $40 billion to $60 billion market today and we're a true leader, and we are the most profitable company in our space important to remember being profitable since our foundation and truly lead by the profitability in this market.

Operator Slide 3 please. Starting with financial targets, the adjusted EBITDA per share rolling 12 months. So the financial target to grow about 20% per year, measured on rolling 12 month basis and the strategy to combine organic and acquired growth. And obviously, this matter gets affected by timing of share issues and conservation of acquired adjusted EBITDA, that's why we had a little bit of a lower level growth in last quarter, but that's as you see, kicked the back up now, saw a 36% growth in Q1 follows the closing of the major transaction in late '21. So this is what we were targeting, obviously with a lot of these transactions, so very happy to report that as the financial targets.

Operator Slide 4, please. First quarter highlights. So the first one is the positioning, I mean, significantly increased scope and sales, so net sales growing 96%, gross profit 156%, and adjusted EBITDA 183% including acquisitions have really diversified our earning base with an adjusted EBITDA of SEK 760 million in the quarter alone. This is by far the most profitable company in this space.

Truly, truly best-of-breed products for mobile messaging, voice calling and email. We're serving now both enterprise customers, developer and SMBs in one company. And so, I think it's a very, very powerful offering.

And the last 12 months pro forma net sales of SEK 24.5 billion and then a gross profit of SEK 8 billion. So that's a very strong position we've taken. We've got higher margins following acquisitions, the gross margin at 32% in Q1 versus 26% in Q4. Adjusted EBITDA margin at 12% versus 9% in Q4, and then coming to organic growth, revenue 22%, 17% organic and then organic gross profit this is primarily the Sinch messaging business of 2% and 5% pro forma organic. And the organic gross profit is obviously not something we're happy with, and not something we think this -- not how this market should -- not how we should live in this market. But that's where it ended up in this quarter.

Focus areas for 2022, obviously increased gross profit growth, really homing in on driving the organic gross profit growth primarily in the messaging segment and ensuring costs, the growing line with gross profit in the messaging and group functions over time. This is what we talked about before. We're in situation where we're growing extremely fast and have been taking OpEx to grow at that level and then it tailed off in 2 quarters here. And obviously then OpEx are set a little bit earlier. So therefore, the OpEx growth takes a little bit on time before you tail it off. We now put in -- play programs in place for that. So beginning of Q1 we did in order to tail off OpEx growth to match the gross profit growth over time here.

We've got a new operating model with full P&L responsibility for the business unit [personal]. So we're happy about that. And then really interesting opportunities for cross-sales on messaging, voice and e-mail products.

All right, operator Slide 5, please. So gross profit evolution, as you see here, organic gross profit being 2%. We talked about it last quarter, the minimum committed to this global mobile operator, causing a 2% negative impact of GP in Q1, so it would have been 4% without that. The rest of this is still an ability to pass -- fully pass on carrier price increases in Brazil and India and price adjustments to significant -- to large customers, causing lower margins or lower organic growth in this quarter. This is something we -- yes, will work really, really hard on going forward.

If you ask us, we would say that the trading environment, we think it's similar to Q4 2021. And we see no major difference in the trading environment, a little bit when you look at the actual numbers, a little bit lower on this quarter, but we think the trading environment is relatively similar.

We also believe this is a strong market. We have seen these things before, a couple of quarters -- a couple of quarters of slower growth. And after a while we work through these things and we get back to the growth levels, and that's our strong -- let's have a strong focus to try to do going forward, of course, as well. Including acquisitions, very -- obviously, a very strong growth, both in Inteliquent, Message Media and Pathwire and driving a lot of growth in this quarter.

All right, Slide 6, please, operator. So adjusted OpEx, so we had slower OpEx growth in 2020 due to the COVID-19 outbreak. So we had OpEx there. And we increased the OpEx base during 2021 to do sales and product initiatives and the large portion to prepare for upcoming large acquisitions, which happened then closed in Q4 to set up the company, all the processes in order to make sure we can handle that. And then of course, businesses acquired during 2020, adding further OpEx.

So in Q1, we had a 7% OpEx increase in Sinch and Wavy from Q4 to Q1. Mostly of this is currency movements. A lot of these costs are U.S. and Brazil. So therefore, compared to the SEK, it's obviously, with the current exchange rate climate, it drives [indiscernible]. We are also, like we said, I mean, we were -- in Q3, we were hiring and those people coming in Q1, and that's now tailing off since we put in OpEx control programs and slowed off hiring in the messaging segment and in the messaging segment and in the group functions, significantly in Q1. In other areas, we are then growing as per OpEx growth -- so as per gross profit growth.

Go to operator, Slide 7, please. This is the net sales and profit development in our messaging segment. So as you see, we had 25% transaction growth, 23% organic net sales growth. And then we have a negative 1% organic gross profit growth in this area. This is a -- we can really see an strong underlying demand from the customers, but COGS and price at the same time, making the gross profit tail off in this quarter and then last quarter. And like I said, we've seen this before. We're going to work through it, it's not a demand problem, but obviously, that is something we need to solve going forward. Message media contributes -- offsets the organic gross margin decline. I'm happy to say that we had 8,600 new message media customers in Q1 and 29% revenue growth and 24% of the GP growth in message media compared to Q1 '21.

Operator, Slide 8, please. Voice and Video, Inteliquent contributes most of the voice and video business, obviously. Inteliquent, as you know, including the 8YY-reform, they had a 1% revenue growth in local currencies and also a negative 1% gross profit growth compared to Q1 '21. The 8YY-reform alone is a 9% impact on the gross profit growth from the price relations on the U.S. toll-free calling. Like we said before, we knew this when we were [hired] the company, and we knew it would be slower reported growth in the first quarter due to this tail off of 8YY. And all of that tails off, obviously, that will tail off in the coming quarters and very solid, strong business with high profitability and high cash flow, as you can see. So we're very happy with this business and our position we take in the market and the stability and diversification it gives to our total group.

We have an Inteliquent deployed sites in Europe with 3 in France, Germany and the U.K. and starting to acquire customers there. We're happy to report that we have 3 new customers in Q1 on these new sites. So really seeing Inteliquent going outside the U.S. market where they are a leader. And this is, in the long run, one of the growth initiatives we have put in place in Inteliquent.

If you remember from the acquisition, we saw this company extremely strong leader in the U.S. market. We knew growth were lower, but we also know if we combine it with a set of growth initiatives going international, increasing the sales force since they only had 8% of their sales and marketing OpEx and sales previously, and then also focusing more on the enterprise segment with programmable voice, then we will be – then our plan is to drive up growth in this business. So the first one here, going international is one of the growth drivers, and we're happy to report the first customers.

High profitability, adjusted EBITDA of 24% of revenue and organic GP growth of -- [Thomas] organic GP growth of 84%. That must be a type of -- yes, sorry, right. Now I understand, this is the Sinch messaging business if we don't talk about the Inteliquent side, Sinch voice business -- so Sinch organic voice business had an organic GP growth of 84% and return to positive EBITDA in this quarter. So super happy to see the strong development in that business, which is now further into the total voice and video numbers, you don't see it [indiscernible].

Okay, operator, go to Slide 9, please. E-mail segment equated upon closing on the Pathwire acquisition had a 27% revenue growth in local currencies and 18% gross profit growth in Pathwire compared to Q1, 2021. The gross profit is affected by investment in scalability. So 2 things, hiring of support personnel, which is counted -- or hiring of operations personnel, which is counted in [COGS] in this business. We were lower than that in the tail end of '20 -- in the tail end here of last year and have hired there in order to better support our customers. And that is a step up in costs over time that we'll keep the same -- will keep a lower growth in personnel on the operations side, so that will come back over the coming quarters.

And then we have a cloud hosting vendor migration, where we right now have double costs because we're moving from one cloud hosting vendor to the other. Eventually, that will result in a cost reduction. But right now, obviously, we have double cost since we have -- we're running 2 cloud hosting members.

High profitability with an adjusted EBITDA of 37%, so very, very solid business as well. We see great cross-sale opportunity with the Pathwire business with all our other businesses. And lots of engagement by the sales teams on both sides. We signed 2 cross-sale contracts in Q1, where enterprise customers in messaging now use Sinch. And we continued cross-sales in Q2, including one of the top 10 global technology companies. And now the contract as such with this global lender or global tech company is a good size contract, but not very large.

But I think the interesting point is we really see even when we go to the largest customers, there is a lot of interest in the Pathwire product, and it's being very well received from the midsize customers and the small customers all the way up to the largest customers. So we shouldn't go over with the size of this contract, but I think the power of actually being able to bring Pathwire into large customer bases, I think it's a very, very powerful and positive signal.

All right, operator, go to Slide 10, please. In the same classic operator segments, we had a 17% organic revenue growth in local currencies and 12% compared to Q1 '21. Strong performance in the messaging interconnect services to mobile operators. Adjusted EBITDA margin stable at 9% compared to 8% previous quarter despite a SEK 7 million impact from the volume commitments from this carrier and operator business will be included in messaging segments after the upcoming since reorganization to the business unit structure.

To remind you, look at Slide 11, the business unit structure. So enterprise and messaging -- driving a 17% GP of last year being a large part of our business, a voice, 32% of the pro forma gross profit 7% of gross profit growth in 2021. Right now, we have the 8YY a little bit bigger in Q1, so a little bit lower there. Developer & Email, 11% of gross profit, but rapid growth. Applications is currently included in messaging, and then we have the SMB segment run about 11% and growing at, like you said, 28% gross profit growth last year.

That said, I will leave to Roshan to go through the financials.

[Roshan Saldanha, executive]

Thank you, Oscar, and good afternoon, good morning to everybody. Roshan Saldanha here, CFO for Sinch. Yes. So I mean, if you turn to the income statement, which is on Page 13, the new essentially see the significantly increased scope and scale of Sinch, with a total net sales of SEK 6.5 billion, growing 96%. Gross profit growing 156% and adjusted EBITDA growing 183%. It also shows the changed margin profile with a gross margin at 32% in Q1 versus 26% in Q4 and adjusted EBITDA margin at 12% in Q1 versus 9% in Q4. Adjusted EBITDA is different from EBITDA, primarily due to acquisition costs, integration costs, cost per share-based incentive programs and foreign exchange-related movements.

The total extraordinary items or adjustments for the quarter amounted to SEK 112 million versus SEK 141 million in the previous quarter Q4, 2021. Of this, integration costs were at SEK 59 million versus SEK 66 million in the previous quarter, more or less being stable through Q3, Q4 and now Q1.

Further down in the P&L, you see the depreciation and amortization of SEK 554 million, which is significantly increased due to the noncash planned amortization of intangible assets created through the acquisitions of Inteliquent, Pathwire and Message Media. SEK 440 million of this SEK 554 million is in total related to these noncash amortization. Excluding these noncash amortizations, adjusted EBIT was at SEK 647 million versus SEK 243 million in the same quarter the previous year. We have net finance income and expenses coming in at SEK 16 million. This includes an interest cost of SEK 53 million, which shows the low interest cost that we have on the borrowings of the company and income tax at an effective tax rate of 20% compared to the profit before tax.

Turning to the next page, please, operator. You see the reconciliation of cash flow to adjusted EBITDA. Adjusted EBITDA is when -- is then affected by paid interest, paid taxes and other items primarily related to foreign currency flows before it ends up in cash flow before changes in working capital. This is the first quarter where we have the full consolidated adjusted EBITDA and cash flow before changes in working capital from the large acquisitions completed in Q4. And here, you see, again, the increased cash flow before changes in working capital to SEK 566 million compared to SEK 226 million in the same quarter of the previous year, giving a conversion of 74%, which is well in line with our expectations.

Moving on to the next page, where you see the cash flow statement. We further take the cash flow before changes in working capital and then we have the changes in working capital, which this quarter came in at a negative SEK 426 million. This is to be equated to a reported minus SEK 24 million in the Q4 of 2021. However, the minus SEK 24 million also included acquisition balances that came in through the closed acquisitions in Q4. Excluding that, there was a positive effect of about SEK 500 million in Q4 2021 for the organic business. The negative change in working capital during this quarter is affected by late payments from a few major customers and also return to normal accounts table levels, which we will come to on the next page.

Further investments remain at SEK 129 million, which is in line with previous trends of between 2% to 3% of revenues. However, slightly increased by the acquisition of Inteliquent, which is higher investments compared to the rest of the group. And also this cash flow statement shows the strong financial profile with diversified earnings pools giving further stability to the cash flow generation capability of Sinch.

Moving on to the next page, operator, which is the -- shows a development of day sales outstanding and days payable outstanding. This calculation is performed on a pro forma basis, both when it comes to the balance sheet and including the acquisitions that we have performed previously. Here, you will see that, in general, the DSO has over this 15-month period trended slightly downwards. However, when specifically compared to Q1 of 2021, it is increased, as I said before, it's related to a few late payments from specified customers, which in the number of days is quite small, but gets a large impact in value terms.

On the DPO side, you also see a very limited change compared to a longer trend. However, DPO can be affected by specific payments as well from Sinch. And you see essentially in December 2021, that [AP] levels were slightly higher, whereas now in March 2022, we are back to more normal accounts payable levels. So this shows that the underlying terms and conditions with our customers and suppliers remain relatively stable over a longer period of time.

Moving on to the next page, where we summarize our financial targets. As we have said before, we have 2 financial targets. Number one, adjusted EBITDA per share to grow 20% year-over-year, and the second one being to keep net debt over adjusted EBITDA below 3.5x, again over time. And fueled by the acquisitions closed during Q4 of 2021. Adjusted EBITDA per share grew 36% in Q1, 2022, measured on a rolling 12-month basis. This includes the effect of share issues and emissions performed and also pro forma net debt over EBITDA, excluding the effect of IFRS 16 related leases on both net debt and EBITDA and adjusted EBITDA came in at 3.1x versus our target of 3.5x.

With that being said, I would like to hand over back to Oscar for concluding remarks.

[Oscar Werner, executive]

Thank you. Thank you, Roshan. Yes. So this quarter, obviously, organic growth, not where we wanted to be. We will work very diligently on that. This quarter, we also positioned the company in an absolutely stellar way in a very attractive markets. Very happy to be when you're now at the trade show, now speaking to the customers, and they really see -- see us as one of the absolute top providers. It is almost like there why would we not do business with you. I think that's a very, very powerful position to be in and really being singled out as one of the top leaders in this market, it's a very powerful position. So that's truly the positive news. And now we need to work very hard to get all the financial top numbers at the right place. Thank you for listening, and let's open up for questions.

[Thomas Heath, executive]

Thank you. Operator, can we have the first question from the conference line, please.

[Operator]

[Operator instructions]. So our first question is from Predrag Savinovic. Sorry if I said that wrong, from Carnegie.

[Predrag Savinovic, analyst]

So my first one is a little bit on guidance. I know you don't guide, but your share price has been quite volatile and you've probably noticed there's some uncertainty also with investors generally. So I'm wondering at what point would you consider issuing guidance of some sort? And if not, why wouldn't that be the case? So any kind of indications on the cash flow or where the growth is trending into Q2 would be very helpful. I'll start there.

[Oscar Werner, executive]

Roshan, do you want to take this one?

[Roshan Saldanha, executive]

Yes. I can try to start off. I think just briefly, Predrag, on the guidance piece, of course, I mean, we have not historically provided guidance. I think analysts like yourself, do a fantastic job actually of forecasting Sinch. I think we're delivering quite much in line with consensus, slightly above this time, but broadly over time, very much in line. I think the challenges I think from our perspective is, of course, that when we look into the business, I mean, there are a few factors that we see that are predictable.

And as we said before, I mean, we think that the cost increases that we've seen and the price changes that we've seen towards customers are things that will play out over time. And I think we have very reasonable visibility into those. But there's always a risk of unknown factors kind of affecting business development. And I think what we've done over the last 12 months essentially through increasing our -- or through diversifying our product pool with increased stability, and increased stability in our earnings pool and in our revenue pool. So that continues to be the effort going forward to work on that front.

On the second [conclusion], I mean, when do we see things turning around? I will let Oscar comment on that as well. I think the first thing, as I said, is we do see that there are things that are negative now that have a limited shelf period and will play out during the course of this year. But that doesn't -- I would not go as far as to say that to make that into a guidance or a prediction, because I think, again, as we said, there could be other unknown effects that might -- that might show up later in the year.

From a cash flow perspective, I think it all -- as we said, working capital, I mean, you see that the underlying DSO, DPO trends are fairly stable. We have short-term effects of some customers not paying us in time during Q1. That's something that we have to -- we continue to work with, but we see no credit risk, and there's no reason to believe that, that shouldn’t come back at a later point in time. Oscar.

[Oscar Werner, executive]

Yes. So on the brand turnaround, that's hard to know. And as you know, we don't give guidance for the above reasons. And the -- we have seen this a couple of times before in this market. And we're talking about the messaging segment, right? That's when we talk organic that we're talking about the messaging segment. The -- we've seen this a couple of times before, and it is not a demand problem. It is not a volume. It's not a revenue problem. Customers are still buying. But then a couple of quarters, you get tougher comparison, tough -- tougher comparisons, we get tougher price negotiations with big customers and with operators and then organic growth tail off. But every time we've seen before, it takes a couple of quarters and then we get back when these changes have [indiscernible] out. And I cannot say today when and therefore, we won't give projection. But we have good confidence in this market and good confidence in our ability to play in the market and therefore, we have good confidence that we'll get back to better organic growth.

On the Inteliquent side, you have the 8YY-reform, of course. So it depends on -- if you look at the reported numbers or the normalized numbers without it, but that is something that will tail off during the coming quarters. So that's an outside more concrete effect that we know of, and that we knew when we made the acquisition of Inteliquent.

[Predrag Savinovic, analyst]

I am still on the line? Can I ask another one?

[Oscar Werner, executive]

I think was that -- is that well, let's count that as one, and you'll get one more.

[Predrag Savinovic, analyst]

I wanted to ask a question on product and security generally. And I think, I mean, it's quite safe to say that you have a true super network compared to our competitors, end to end, making by definition, a safer, more reliable service than some of your competitors, most of them. And I know you're already embedded in some security applications as well. Trying to see if this is something you can give you an edge in the market and win more business on as well, because that's also quite an important theme generally speaking, right?

[Oscar Werner, executive]

Yes, it's a very important thing. Definitely, in some areas, it can, especially towards smaller players, you can. And then in some regions, you can -- so that's something we work hard on. And we think it's a very important feature of this type of product in the market. And definitely, that is in many RFPs. We get asked by security and security reviews and have audits, et cetera. And in many cases, that's something we can win business off.

[Operator]

Your next question comes from Stefan Gauffin from DNB.

[Stefan Gauffin, analyst]

Yes. So I will try to ask Predrag's question in a different way. So on the drag on the gross margin, you have mentioned volume discounts to large customers, and that was introduced in Q1 last year, so likely full impact in Q2. Price increases from operators was first mentioned in Q2 and slightly then fully impacting Q3 or at least in Q4. And then it was the fixed volume contract that was introduced mid-2021. And there, we know that, that should end in June. So I mean, these -- when these things play out, you should start to see easier comps. Did the timing that I said was that correct? And hence, should we start to see at least easier comps from Q3 and onwards?

[Oscar Werner, executive]

I'll take -- try to reply to that one. I think you're right in highlighting some of the things that we've talked about over the past years that affect our business. At any given point in time, we try to bring up, of course, the most material aspects that affect performance. You're also right that sort of how the math works out is that typically in 12 months after a deterioration, you are facing easier comps, right? And that sort of creates relief unless you see a continued underlying pressure or something new arising. I think what we're careful to avoid is to say on a total level, things will improve by this -- and this time.

We can confirm that there are numerous factors that will ease gradually during 2021. And of course, if nothing else happens, then that should reflect an improvement in our numbers. With that in mind, we're very careful to avoid any hard statements as we -- some parts are quite hard to predict. I mentioned one concrete such areas. You take the -- some of the carrier price increases that we talked about do not do not make a lot of sense from our point of view. And of course, that makes forecasting carrier behavior in that sort of situation a little tricky. That's not necessarily representative [rural] carriers of all parts of the world, but in this particular case, and if we talk about Latin America, that's the case, right, it makes it harder.

Roshan, anything you want to add to that?

[Roshan Saldanha, executive]

No, I think that's good.

[Stefan Gauffin, analyst]

And then regarding OpEx, you mentioned that you have sort of put a break on that during Q1. So should we expect that it can be much more stable going into Q2, Q3, et cetera?

[Oscar Werner, executive]

Yes, to put a break on the messaging and core functions, just -- I mean, running it to the business unit means that you've got to own the business units that grow, you've got to continue to grow, right? And the business units that don't grow, they got to tail it off. That's how you have to run it, right? So yes, we've done it in messaging core functions. And we very much see employees, which is the largest part of our cost base, tailing off. We see that right now.

But in Q1, we still have the backlog effect from hires down during late in mid-2021, right? So that's what we expect because we will follow our commitment to run the GP and OpEx growth over time in line. This is what we have talked about a couple of quarters. It's hard to time exactly, especially when you do like what we did here. If you consider we were growing very, very rapidly organically. And we did [M&A] growth, we're setting up the -- we needed to take investment to support that and then the organic growth tail off. And it's hard to do -- it's hard to do that quick enough, right? You always wish you did it quicker, but that's what's happening right now, and then we'll have to do it a little bit to make sure we match it over time.

[Operator]

Your next question comes from Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, analyst]

First question would be a little bit if you can comment a bit here, one of the market's most comprehensive CPaaS portfolios now. Obviously, early days, but can you give -- as there any proof point that your best-of-breed strategy really work with regards to cross-selling that could create better customer stickiness as well? That's the first question.

[Oscar Werner, executive]

No, definitely, I mean, the most -- one of the most concrete examples of that is cross-selling of the e-mails. And we sold 2 customers in Q1 and then continued in Q2. We stated one of those customers was one of the top 10 global tech companies. I think I'd say -- and I'd say the contract such is a good solid contract, but it's not massive and huge, so let's not read too much into that individual contract. But I do think we see the trend of walking in with our total portfolio into these very large customers as a very positive reception that we know now. And that is exactly what I think we were after with combining this group. And I think we see strong signal there on everything from small to very large customers.

[Daniel Djurberg, analyst]

Perfect. And my second question, if I may, would be on the -- you mentioned the pricing in Brazil and India and also you didn't see it, it made sense for operator raising prices to this level. But still, since volumes are still kept quite high, and growth i.e. when the CPaaS players take the hit, so to say, in margin, why does it make sense for them? And why shouldn't the price increases continue given that the buffer is -- CPaaS play right now? What do I miss?

[Oscar Werner, executive]

Yes, I don't think the buffer -- I mean, since it's only a small portion of the buffer, right? If you increase the price with 30% like that they've been [indiscernible], a small percent of that is obviously buffered by us in this case, but the majority is taken by the customer. And what's happening then is the customers eventually starts to find other channels, which may be WhatsApp or so, which comes back to us in revenue in another channel. But that's when the operator takes the price -- takes the hit, right? So it's not the full monopoly, because there are other channels to customers and therefore, they will eventually see that, all right, that strategy doesn't work.

And again, I mean, the price increase, it's nothing new. It has happened many times before, it is unfortunate when it happens, but we've seen it many, many times before, and we have this pattern and then after a while, we get back to solid margin and growth, right? So that's nothing new in this market.

[Operator]

Your next question comes from Andreas Markou from Berenberg.

[Andreas Markou, analyst]

So the first one is kind of a follow-up on Brazil and India. I guess, what is your conviction that you can actually pass on these price increases in the next couple of quarters, given that I think the general economic expectation is that the macro situation will remain quite difficult in those countries? So that's the first one.

[Oscar Werner, executive]

I'll start off with an answer to that one. I think you need to differentiate 2 factors here, right? It's -- what you're essentially seeing is a margin compression due to these changes, right? And just the way the math works out is 12 months later, you will have annualized that deterioration and your comparables improve, right? That we can say with some confidence, of course, that 12 months after deterioration, things get a little better unless something new happens, right? So that's relatively mechanical.

Then, of course, whether you can actually recoup or pass on the actual rise to end customers is a little bit of a different question. What we said in Q4, and I still think remains true is for India, it's more clear. The cost increases as a very specific nature and is related to a technological improvement due to digital ledger technology to [indiscernible], which is genuinely a good thing for the market, right? It just takes time to pass it through. In Brazil, it's more a question of tough competition and sometimes a rational competition where it's harder to call how that will develop. But to round things up, the annualization of course, takes 12 months.

[Andreas Markou, analyst]

Okay. So I guess you are confident of being able to pass this on, in the next couple of quarters?

[Oscar Werner, executive]

That's not what we said. I think what we said is 12 months will have passed and we were realized.

[Andreas Markou, analyst]

And maybe on the second one, just on Inteliquent, can you give us a bit more detail on the steps you are taking to improve the growth in the coming quarters? Obviously, you mentioned again the [mechanical] factors, the impact of 8YY tailing off. But what are the actual steps you're taking to materially improve growth here?

[Oscar Werner, executive]

So yes, you're correct, to mechanical factors 8YY tailing off and you got the COVID effect. They had a 30% kind of sudden increase in -- when COVID. So that's the 2 things that are mechanical, if you will. The other area, it's 3 areas. It is internationalization of their offerings. So we've now done Germany, France and the U.K. And in there, they have launched services or deep services. And there, we're now starting to win customers. So that's one.

And number 2 is, we're increasing their sales and marketing efforts. If I remember correctly now from the acquisition, I think are -- acquisition, 8% of their OpEx was in sales and marketing. I may be wrong on that number with a 1% or 2%, but a very low percentage. So we're increasing the sales and marketing effort and it's very logical. They have a very large network, a very strong network, but not enough resources in sales and marketing, and therefore, they're not really capitalizing enough on the network. So that's number 2.

And number 3 is an increased focus on programmable voice and selling into enterprises. So Inteliquent has traditionally and not had a solid software offering on top of their network, and they have not tried hard enough to sell to enterprises. They're mostly sold to what they call carrier service providers or maybe CPaaS providers or the UCaaS and the CCaaS providers. So the very large providers is what they've sold to, but they're not sold to enterprise. So that's basically an untapped market for them, and we're addressing that market as well. So that's the 3 main growth bets for Inteliquent.

[Operator]

Your next question comes from Mohammed Moawalla from Goldman Sachs.

[Mohammed Moawalla, analyst]

I had 2 questions. Firstly, obviously, you're managing a series of headwinds, some related to, obviously, the pricing of the Telcos, you've also kind of be the integrating acquisitions. As we start to look at these headwinds and how they start to shift, I know with the Telco pricing, you're saying this may take several quarters. But in terms of kind of your own kind of integration of the acquisitions, how should we think of this in terms of impacting that sort of gross profit evolution? Is -- should we see that we're kind of at a troughing point in kind of Q4, Q1? Or is that trough kind of be a perhaps a bit longer? And then 2023 is really more the year of a step-up in kind of gross profit acceleration?

And then the second question I had was, if you see volumes move from SMS to sort of WhatsApp, will this be kind of gross margin accretive. And so, when the Telcos kind of hike up prices as well, how much of this could drive channel shift as well.

[Oscar Werner, executive]

And maybe you start with the first question. I'll take the second.

[Roshan Saldanha, executive]

Yes. So I mean, on the pricing side, Mohammed, I mean, the pricing -- Telco pricing side and the integration, I mean, of course, what we see essentially, as Thomas mentioned earlier, is you have this annualization effect, right? And in the markets that we've already talked about in the previous quarters, I mean, you have this annualization effect, which will drive out -- which would run out during later quarters this year. I think what we are seeing is we've seen positive signs from the integration of SDI. I think that's something that we talked about during 2021 as a drag on growth. And I think right now, it's not as much of a worry, and I think it's been integrated very well. One of the things that you might like to remember is also the fact that the acquisition of Wavy in LATAM became a part of the organic growth from February of 2022 because that acquisition was closed in the beginning of February 2021. So sequentially, the weightage of LATAM in the organic base has grown in Q1 compared to Q4 last year.

Now from a tailwind perspective, I think what you're seeing essentially is the margin profile changing due to the acquisitions that we've done in late 2021 and the gross margin kind of going up to 36%. And I think that is something as we see more cross-sale of e-mail and voice, as well as, SMS and WhatsApp to our customer base, we should see a positive development in all else like possible development in the gross margin development over time. So hopefully, that was answer to your first question.

And then Oscar, I don't know if you want to comment specifically add to that or comment specifically on the SMS and WhatsApp.

[Oscar Werner, executive]

Yes, the SMS and WhatsApp, it is -- it's 2 things, right? One thing that happens is just the transaction volume moving from text to WhatsApp, I think that's equal or hard to tell what the margin is on the pure sending transaction. But what does happen is with WhatsApp, you get the more interactive, you get a more interactive solution. So people start to respond a lot more, when people start to respond, you also need to maybe sell [a bot] to it. So you get into selling also more of a proper SaaS service on top of the channel. And that is typically driving up gross margins. So transaction level may be similar but in some cases, lower, in some cases, higher, a little bit depending on and then you have the kind of the SaaS service on top, which is typically higher. That's typically what happens, right?

[Mohammed Moawalla, analyst]

Sorry, I could come back to my first question. So I guess what I was trying to kind of better understand as we think of the growth trajectory, what I was trying to say is the year -- this year going to look very similar to what the last few quarters has been? Or is there kind of chances of what kind of reacceleration spike at the back end of the year? Or should we wait until '23 before we see kind of the full effects of kind of growth acceleration?

[Oscar Werner, executive]

Yes. I mean, we don't give forward-looking projections, but from our perspective, we obviously work really hard to get to the increased gross profit growth and again, it's like get our revenue and volume growth down to the gross profit level. I mean, that's what we're talking about here, right? It's not that customers not paying. It's not like we're not growing on the top line side, but it's getting that down to the gross profit level. We're working really hard to do that as soon as possible. Exactly when it happens, it is a little bit hard to tell. But previously, when we see this, it's a couple of quarters and then we have previously gotten back. So that's what we're working on.

Thomas, I don't know if you want to add anything.

[Operator]

Your next question comes from Fredrik Lithell from Handelsbanken.

[Fredrik Lithell, analyst]

Just I was thinking about messaging with a minus 1% organic gross profit growth, and you alluded to many factors behind that. Have you done your own sort of calculations and taken out 1 or 2 or 3 or 4 of the volume commitments situations? Or have you taken out in Brazil and India effect and see what sort of the remaining underlying entities are doing in terms of organic gross profit growth. Is that sort of an elaboration you do and that you could share with us that would be the first question then?

The second one is on Inteliquent again, if you could sort of elaborate a little bit on the split between the CPaaS unit and the interconnect units and how they are progressing and how they sort of combine into the trend you have right now?

[Oscar Werner, executive]

I'll start with the first one. What we have disclosed in terms of the different components of messaging. So we've quantified the effect of this fixed price agreement that we first talked about in Q4, which had a minus SEK 37 million effect, 5% on gross profit growth in Q4, minus 15% -- minus SEK 15 million for the total group and minus 2% effect on gross profit in Q1. So that's been quantified.

In terms of separating out the effect of individual carriers or price changes and on the other hand, talking about price changes towards customers. Of course, we do a lot of math. It's not perfectly clear cut in the sense of interdependency, right? The one thing actually affects the other. And where we -- what we've said is these are the 2 main things we want to call out in why the healthy revenue growth that we see is not translating currently into gross profit growth.

On the Inteliquent question, the CPaaS versus interconnect, I didn't really understand the question.

[Roshan Saldanha, executive]

So I think to give some background and then Oscar, I'll hand back to you. I mean, when we acquired Inteliquent, we said about half of the business is carrier related and half of the business is enterprise related or more CPaaS oriented, right? So that's the split. And we've said that long. We will invest to grow on the enterprise side, it is one of the aspects Oscar alluded to earlier. This has been in the books for a few months, there hasn't been any material changes since lost. But we could come back perhaps with more details. It's an interesting topic, and of course, a source of long-term growth acceleration in Inteliquent.

[Oscar Werner, executive]

Yes. So yes, no material changes from previously. I mean, we only closed that acquisition a couple of months ago. We see low traction on the [internalization], happy about that. We start to see traction on the enterprise side about that. But it's a big base. So in total numbers effect impact right now. There's no material impact on the numbers yet, even though we see the early signs, right?

[Operator]

Your next question comes from Pontus Wachtmeister from SEB.

[Pontus Wachtmeister;SEB;Analyst, analyst]

When we spoke a while back, you mentioned that this amortization of the PPAs that were not fully tax deductible. Looking at the first quarter, it doesn't seem like they seem to have been tax deductible. Is there anything you have changed in your -- how you look at those? Or did I misunderstand the first time?

[Oscar Werner, executive]

I think the tax deductibility of acquisition-related assets and depreciation for acquisition-related assets it varies a lot from country-to-country, from jurisdiction-to-the restrictions. In some countries, we can even amortize goodwill and obtain tax reductions. So that there's also -- sometimes we need to perform pushdown accounting or merge entities to be able to get that tax deductibility. This is something that we are working with and in these jurisdictions, both working internally and with external advisers to find optimal structures, right? So that we -- so that we responsibly paid tax both for our shareholders and for those countries we operate in. So I don't think there's a straightforward answer that says that all of that is tax deductible or all of it is not tax deductible, but rather it's kind of a mixed answer for jurisdiction. I think in general, an effective tax rate that we have reported -- as we've reported this quarter and maybe a little bit north of that is a fair assumption to have in the medium term for Sinch.

[Pontus Wachtmeister;SEB;Analyst, analyst]

So there is -- some of it won't be deductible, I can try and use as a proxy but not all.

[Operator]

And your next question comes from Daniel Thorsson from ABG.

[Daniel Thorsson, analyst]

I have a question on the demand side. We basically see all of your CPaaS players growing healthy on top line. You had a 22% organic sales growth this quarter, even though it has been coming down a bit lately. So if we leave the COGS challenges out for now, where do you see growth coming from? And is there a risk of deceleration further during 2022 as we leave the pandemic behind us to a larger extent. I mean if we see a slower organic sales growth, even a stabilization of the gross margin would result in pretty modest GP. So just to try to understand the demand situation and how do you see 2022 developing?

[Oscar Werner, executive]

No. We see, in general, a solid demand for CPaaS services. And I think all the -- all the trends and projections that people have done, like [Gartner] from what I said, 15% to 80% of all major enterprise customers will buy CPaaS services up until 2025. We see those trends happening. So I think demand side is good in general, and we see a lot of demand for the services in -- across all the different product lines.

[Daniel Thorsson, analyst]

So no reason to assume a slower growth on sales organically during '22?

[Oscar Werner, executive]

No, I don't think so. I think it's more than down to the sheer size of, I mean, as you get larger and larger, right, but it's -- we don't see any slowdown in the market or slowdown in interest from the customers or slowdown in their willingness to pay for these type of services, no. You may, of course, have in the pocket here something happened there, but not in general. So in general, we believe we're in a very strong market and very well positioned. Then I 100% degree, there are -- the organic growth side needs to be higher, right? So -- but in generally, strong market, strong position.

[Daniel Thorsson, analyst]

And then a question for Roshan, the technical one. The SEK 440 million amortization of acquired assets in Q1, is that a fair level to expect going forward as well or anything moving in Q2 here?

[Roshan Saldanha, executive]

No, I mean, that might change marginally during the course of the year because purchase price allocation is only preliminary when we first recorded and we have a 12 month window post completion of the acquisition where we view the purchase price allocation and make adjustments as we can come back to that back and explain more.

[Daniel Thorsson, analyst]

But how far, we can assume that level going forward, I guess? No direction here that you can guide on?

[Roshan Saldanha, executive]

That's fair.

[Operator]

Thank you for that, and thank you operator for all the question. I'll hand the word back to Oscar for concluding remarks.

[Oscar Werner, executive]

All right. Thank you for your interest. Obviously, Sinch has historically been providing very solid growth numbers organically and solid M&A growth numbers. These 2 quarters, we did hit the M&A driven -- the nonorganic growth numbers. We did not hit the organic growth numbers. That is our #1 focus going forward. And we are very happy with the position we've taken, and we see we have a very, very strong position in this market. And we do believe this is a very strong market going forward and a very large market, and we are excited to continue to work in it. And I think that will conclude the remarks for this presentation, and thank you a lot for listening and thanks for asking all the questions.

[Roshan Saldanha, executive]

Thank you very much.

[Thomas Heath, executive]

Thank you. Bye.

[Operator]

This does conclude today's conference call. Thank you for participating. You may now disconnect.