Sinch AB (publ)

STO:SINCH

Earnings Call Transcript 2023-Q1

[Thomas Heath, executive]

Thank you very much, operator, and good afternoon, everyone. Welcome to this earnings call where we present the Q1 2023 Results for Sinch AB. My name is Thomas Heath. I'm Chief Strategy Officer and Head of Investor Relations. With me today, I'm very pleased to say, is our CEO, Laurinda Pang, alongside our CFO, Roshan Saldanha.

And with these opening remarks, I'll ask the operator to move ahead to Slide 3 for some opening remarks from Laurinda. Laurinda?

[Laurinda Pang, executive]

Thank you, Thomas. Good afternoon, everyone. It's such a pleasure to be with you today. And as I've been in the role for just under 2 weeks, Roshan will cover the detail around our results for the quarter. And during the Q&A session, he and Thomas will answer most of your questions. But with that said, I thought it was important to share some of my thoughts this morning and to properly introduce myself.

You might be wondering why I'm excited to join Sinch. And there are 3 areas that I evaluated to answer this very question for myself. The industry, the company and the world. I've spent most of my career working with enterprises around the world. And what I know to be true is that for them to compete and win in their respective markets, name is digitally transformed. And I know that's an overused phrase, but the reality is that today's consumers are extremely demanding. You and I as consumers, have huge expectations. We expect speed and ease. Consumers are not lowering demands, rather, they will continue to expand and accelerate.

So for enterprises to compete and win, companies must make their products and experiences easy and fast for us to consume. Cloud companies who enable omnichannel communications are more than simply relevant in this equation. They will continue to play an important role in the ecosystem of enabling enterprises to meet their business objectives around growth and efficiency.

In fact, we can all see the analyst reports who say that some segments will grow impressively in coming years. Of course, given the variations of products within CPaaS, some segments will grow faster than others. And we all know we are facing challenging macroeconomic environment.

Next, I look at the company itself. We talk about Sinch as a CPaaS player and as a communications cloud for customers. We hit both of those labels, but I also see Sinch as a customer experience company who is well suited to address the needs of the market as I described just a moment ago. Sinch makes it easy for enterprises to maximize opportunities across every phase of their customers' journey.

The strategic investments and acquisitions we have made, particularly in the past few years, are both compelling and comprehensive. This is a company that has been profitable since day 1. As a set of founders who were visionary yet humble, a Board who is engaged and committed and over 4,000 colleagues around the world to operate with a core set of values around trust, respect and collaboration.

This collection of talent, culture and technology portfolio is our competitive advantage. These are the right ingredients for reaching our potential for both organic growth and continued consolidation.

Finally, the role itself. The question I ask myself here is, do I fit? And can I have a meaningful impact to help Sinch reach its ambitions? I've answered yes to both of those questions. And here's what you should really know about me.

I'm customer obsessed, I'm employee-oriented, I've been leading transformations across large-scale organizations for many years, I've led commercial and operations teams around the globe, I'm demanding about operational excellence because I believe in the power of operational discipline, delivering efficiencies and more importantly, it enables exceptional experiences for our customers.

So in summary, my background has prepared me well for the honor of leading Sinch today. Operator, could you please move us to Slide 4.

I'm not prepared to unveil a new strategy or commit to new deliverables at this time. And in fact, it's really important to know that our strategy and key commitments remain intact, meaning that we continue to focus on cost control, cash flow and organic growth. However, I am happy to share some of my initial thoughts on how we progress in these important areas and where our opportunities are to create value.

So for today, I'll highlight 2. Integration is highly complex and cannot be considered a monolith. When describing integration programs, I often talk about the need to solve a Rubik's Cube. We need to solve across infrastructure and core IT system, product platforms, mastering data, harmonizing processes, account assignments, incentive systems and the list goes on.

And by the way, we also need to execute against all of these so well that we ensure our customers are not impacted negatively. These are not easy, and they do require strong planning and governance. We have an opportunity to improve our integration execution.

Go-to-market strategy is another area that requires more attention and better execution. Starting with customer segmentation, who are we targeting and with what products and solutions, and how are we going to sell and support these customers? Just as integration cannot be considered a monolith nor can the enterprise customer segmentation.

There are specific personas within enterprises that we need to design our selling motions towards, including developers, marketeers, operational and business leaders. And as such, our Sinch platform is integral in our go-to-market strategy in addition to traditional selling and customer success promotions.

Integration and go-to-market are top of mind for me and the rest of the team. And we're urgently assessing our plans here along with other value creation opportunities, and I look forward to sharing a more comprehensive plan with you in the future.

Until then, thank you for joining us today and for giving me this opportunity to speak with you. I'll hand it over to Roshan now.

[Roshan Saldanha, executive]

Good afternoon, everyone, and thank you, Laurinda, and welcome again to your first Earnings Call at Sinch. Let me begin by summarizing the first quarter if we move to Slide 5.

We identified 3 priorities in Q2 2022, which are cost control, cash flow and growth, and we are executing accordingly. So we're pleased to see that cost development is in control and in line with actions taken.

Adjusted OpEx has reduced by 4% in constant currencies, excluding one-offs in the quarter versus the second quarter of 2022 when we started the cost reduction program. If we look at the Sinch perimeter prior to the 2021 acquisitions, adjusted OpEx has reduced by 6% over the same period.

Net sales grew 6%, gross profit by 8% and adjusted EBITDA by 10% year-on-year. And we have a diversified business and several segments grow well, while others experienced challenging market conditions. However, on an overall basis, margins are slightly increasing with gross margin going up 1 percentage point to 33% in the quarter when compared to last year.

We've also taken the next steps in integration and implemented organizational changes and launched a combined leadership for messaging and e-mail to accelerate product integration and unlock cross-sales potential across regions and customer groups. I'd like to remind everyone that this is a clean quarter, no acquisitions during the last 12 months, and hence, we have the same parameter in Q1 '23 as in Q1 2022.

Our leverage ratio, which is net debt to adjusted EBITDA, excluding impact from IFRS 16 leases remained stable at 2.7x. We're also excited about bringing to market an application suite to enable enterprises to deploy conversational messaging within marketing and customer care. This is a true integration success, building on functionality from MessengerPeople and Chatlayer as well as leveraging Sinch's Conversation API.

Moving on to the next page. When we look at Q1, we can conclude that we continue to see positive effects from the cost reduction program we launched in Q2 last year. The chart shows how adjusted OpEx has developed. Adjusted OpEx is defined as a difference between gross profit and adjusted EBITDA. The yellow parts show OpEx added from acquisitions in late 2021, whereas the green part shows the organic development where you see a flattening out of the short increase from early '21 to early '22.

Total adjusted OpEx in Swedish Krona is 1% lower in Q1 '23 compared to Q2 '22 in constant currencies, excluding one-off items, that is 4% lower. The cost reduction program launched in the second quarter, targets primarily the green area on the chart, which is the cost base before the acquisitions in the end of '21.

Looking at this cost base, adjusted OpEx is down 6% in local currencies since we launched the program. Again, looking at Q1 '23 versus Q4 2022, sequentially. Costs are lower. This is true also for the green part of the chart when you add back the SEK 60 million of onetime items that we called out in Q4 2022. We have also called out a reserve provision related to legal fees in voice, which benefited OpEx with around SEK 35 million in the first quarter '23.

Let's move on to the next page. Page 7 shows a bridge explaining our underlying gross profit development. In Q1 '23, we had organic gross profit growth of minus 1% across the entire business. Excluding the impact from a previously communicated price change to one of Sinch's largest customers, organic gross profit growth would have been positive.

Since there have been no acquisitions during the last 12 months, we don't need to look at pro forma development. Gross margins were up -- were 33% up compared to 32% in the comparison quarter last year. The Swedish Krona weakening against major currencies have helped gross profit growth by SEK 189 million or 9%.

When speaking to the individual segments for messaging, organic growth in gross profit was minus 8%. Again, excluding the impact from the previously communicated price change, organic gross profit growth would have been at plus 3%. Messaging volumes were up 2% year-on-year, which has been affected by the economic downturn, lower volumes of traffic from large senders who have been sending at low margins and reduced domestic traffic in Brazil where we continue to lose share.

Turning to voice. Organic GP growth in the Voice segment was at minus 2%. This includes a negative effect from the 8YY regulation change in the U.S., which is 4%, without which we would have been positive at plus 2% organic GP growth. And the number of verification business continues to be a strong contributor to growth in the Voice segment.

In Email, organic GP growth in the Email segment was 23%, driven by new customer acquisition, volume growth and improved gross margin from moving to a different cloud service provider.

Within SMB, organic GP growth in the SMB segment, overall, was 2%. However, we see that we have extremely strong growth in the U.S. market and in the online self-serve businesses, which is offset by slower growth among larger customers -- larger enterprise customers in Australia.

Turning to Page 8. This slide shows pro forma figures for Q3 and Q4 2021 to ensure comparability and shows the gross margin and adjusted EBITDA margin developments over these quarters. Gross margin stability shows the strength in our product proposition towards customers. We believe we can improve this overtime, as the higher-margin products are growing faster.

In Q2 '22, as you know, gross margin and gross profit was affected by a reassessment of reserves for accrued traffic costs by SEK 162 million, which affected both gross margin and adjusted EBITDA margin. Again, stable gross margin over a longer period of time is what we see on this page, and there is, of course, some difference in seasonality between affecting gross profit and OpEx as well.

Moving on to Slide 9, which shows our income statement. Worth calling out here is that we have currency effects affecting revenues, gross profit and EBITDA. When we compare reported and adjusted values, the largest adjustment items between EBITDA and adjusted EBITDA is integration spend at SEK 47 million. This relates mainly to integration of platforms in our messaging segment from previous acquisitions and in our SMB segment, the migration of SimpleTexting onto the MessageMedia platform.

We also have some operational foreign exchange rate losses and a small earn-out payment related to tax items in Brazil from the acquisition of TWW. Depreciation and amortization of SEK 605 million for the quarter includes non-cash amortization related to acquired assets of -- and that non-cash amortization is SEK 496 million. Adjusted EBIT grew to SEK 725 million, excluding EBITDA adjustments and the amortization of acquisition-related assets.

Net financial expenses were SEK 162 million in the quarter, with interest costs amounting to SEK 133 million which gives us an effective interest rate of close to 5%. The Group's effective tax rate in the quarter was 3%, which is lowered by recognition of deferred tax assets and re-matured deferred tax balances due to changed tax rates.

Please turn to Page 10. A key focus for Sinch. I mean one of our top 3 priorities has been cash flow and within that has been reducing our overdue accounts receivables. This graph shows days sales outstanding and includes all of our accounts receivables, both billed and unbilled as well as accrued income and is -- and also includes pro forma net income.

DSO was down in the quarter at 56, which is down from 60 in the fourth quarter, and this has been possible due to continued focus on recovering outstanding customer receivables.

Moving on to Slide 11, where you will find a bridge from adjusted EBITDA to cash flow before changes in working capital and to explain the effect between these items. As in the previous quarter, we calculate cash conversion after CapEx, tax payments and interest payments. Normally, over a longer period of time, we believe this business should be in the 40% to 50% range. Last year, we had a release of working capital, which helped cash conversion.

On a rolling 12 months basis, we have, as of the end of Q1 '23, a cash conversion of 60%. However, in the quarter, cash conversion was at 7% caused by decreased accounts payable and higher paid interest also paid taxes tend to be seasonally higher in Q1. Please note that working capital can be a bit lumpy as we have large enterprise customers, a payment from one of our larger customers ending on the right side of the corporate end can affect this KPI significantly.

Please turn to the full cash flow statement on Page 12. Note that we paid down debt by over SEK 300 million during this quarter. Cash flow from operating activities for the quarter was at SEK 212 million. We have a strong financial profile with a diversified earnings pool and also net working capital as a percentage of sales continues to be low, which shows the asset-light nature of the business. The Group had a closing cash balance of SEK 1.9 billion as at year-end. In addition, we have available bank overdraft facilities of SEK 911 million.

Please turn to Page 13, where you see net debt over adjusted EBITDA, our leverage measure. 3 components affect net debt over adjusted EBITDA, adjusted EBITDA growth, cash generation and also the immediate currency impact on debt with a trailing impact on earnings.

In the quarter, we are happy to see the flat development of net debt to adjusted EBITDA. We expect to continue deleveraging this during 2023 and -- from both -- from earnings growth and cash generation.

Turning to Page 14. We reiterate our financial -- our unchanged financial targets to grow adjusted EBITDA per share with 20% per year and to keep net debt over adjusted EBITDA below 3.5x overtime. Adjusted EBITDA per share grew 55% in Q1 2023 measured on a rolling 12-month basis. And net debt to adjusted EBITDA is at 2.7x, which is well within our financial goals, and a reduction from 3.2x as at the end of the third quarter of 2022.

For the last 12 months, there is no difference between pro forma and reported EBITDA, but the EBITDA excludes the impact of IFRS-16-related leases on both net debt and adjusted EBITDA.

Turning to Page 15. I'd like to reiterate the priorities that we set out in the second quarter of 2022. We continue to work with cost control, cash flow and growth. Looking at our entire business, we have a healthy business with stable and slightly growing margins and a very diversified earnings pool. There's still potential to extract further cost and revenue synergies from the acquisitions closed in late 2021.

With this summary, I would like to hand over to Laurinda to highlight some of our recent announcements about our partnerships with the world's largest global tech companies.

Please operator, please move to Page 16.

[Laurinda Pang, executive]

Thanks very much, Roshan. So partnerships in ecosystems are important ingredients to any go-to-market notion, and that is true for Sinch here. We are uniquely placed to serve large global cloud platforms who want to make customer communications a part of their offering. A few reasons why that's true.

Our Customer Communications Cloud covers all the most relevant communications channels that business used to communicate with their customers. We handle hundreds of billion interactions across Messaging, Voice and Email. We support both established technologies like SMS messaging and emerging channels like WhatsApp and Apple Business messages. We operate the largest independent voice network in North America, and we control our value chain with direct connection to hundreds of mobile operators, which improves our delivery rate, shortens latency and insures data remains private.

So during Q1, we've announced important partnerships with Salesforce, Adobe and Microsoft. Let me talk through a few of these or actually, through all of them and explain why. Together with Salesforce, we ensure that businesses can communicate with their customers throughout the world using SMS and new messaging channels. We've worked with Salesforce since 2014, with product teams in active engagement to align roadmaps and deliver new functionality.

We also have a strong relationship with Adobe, and we recently were awarded Adobe Digital Experience Technology Partner of the Year Award for customer journeys. With Adobe, we have built out some very innovative functionality for conversational messaging, where they leverage our capabilities across multiple communications channel. Here, we have also have a new partnership model where Adobe resells our product, which is a step up from our previous engagement with them.

Turning to Microsoft. We enable businesses to use their Microsoft Teams product to call and receive phone calls through the regular PSTN voice network. Here, we made 2 announcements. One about enhancements to our products that make it easier for third-party system integrators to help set up and configure voice calls and teams. A second related announcement calls out to our cooperation with one such partner for professional and managed services. Moreover, we also work with Microsoft in different use cases, leveraging other products and voice. Of course, there are many more customers and partners beyond those we showcase on this slide.

And engaging with customers is one of my top priorities as CEO, and I've had the opportunity to have several calls this week with customers. As an example, I had a great conversation with a leading European MarTech company just yesterday, who uses us for SMS and now looks to switch to Sinch also for email. They send around 700 million SMS messages per year on behalf of their customers, and we are one of 2 suppliers to them.

But they also send more than 10 billion email messages, a service they are currently buying from a competitor. And as we now have capabilities across both messaging and email, we see opportunity to significantly increase the scope of that particular engagement and relationship with that customer.

I would say that each of the conversations that I've had with customers this week have reinforced the thesis around Sinch building and acquiring -- or through acquisition, building a portfolio of services across all communication channels. The customers see the value proposition. They are excited about the portfolio of services. And I am really looking forward to helping to take Sinch to the next level by leveraging that entire portfolio on behalf of our customers.

So with that, I'll turn it over to -- or operator, I'll ask you to start up into the formal Q&A session.

[Operator]

[Operator Instructions]

First question comes from the line of Akhil Dattani from JPMorgan.

[Akhil Dattani, analyst]

Could I start just really asking about the trends we're seeing at the moment and just maybe how we should try and think about them. So there's 2 parts to the question. One is you've now reported 2 quarters of negative trend. I'm trying to understand how we should think about it. I mean it's clear that there's a macro element to this and the economic environment is unhelpful, but if we look at your peers, they still seem to be reporting double-digit growth rate.

So I'm just trying to understand what you think the difference here is? Do you think it's those operators they're just behind the curve and they'll ultimately see the same trend as you? Or do you think you're underperforming? If you think you're underperforming, why do you think that is?

And then the second part of the question is really about how we think about the look forward. Obviously, we know that comps should get easier over the next couple of quarters due to various items you've been highlighting over the last 12 months. I wonder if you could remind us of how big those comp items are? And I guess, ultimately, what I'm trying to understand is, do you think that's sufficient for trends now to stabilize and accelerate? Or does the macro make it too difficult to call?

[Laurinda Pang, executive]

Okay. This is Laurinda and I'll kick off, but then I'll turn it over to Roshan to finish out. With regards to the past 2 quarters, I would say in Q4, we did talk about the headwinds from a macro standpoint. But in Q1, I wouldn't say that anything has worsened necessarily, but certainly, we have a full quarter impact of those headwinds. So I think that, that's what you're seeing different sequentially, if you will.

But I think what's really important to note is that demand is still very much there. And we see that in the form of new customer acquisitions. And you will have seen in our report today that Email specifically, GP has grown by 23%. On the Messaging side, even though we have a large base on the Messaging side, which has been impacted with regards to macro, we do still see new customer acquisition in that part of the business.

Our SMB business in U.S. specifically continues to grow very nicely. So I think that we have a bit of a tale of two cities, if you will. First is the large base that is being impacted by the macro. But we have the other parts of the business that are poised for substantial growth going forward.

[Roshan Saldanha, executive]

Yes. Thank you, Laurinda. I think that was great. I mean if I were to expand a little bit, first, on those, I think, as Laurinda said, I mean, we have -- we do have parts of the business that grow well. I point to the Email. I think if you look at the online self-serve business within SMB, we have a similar trend. I also think gross margins are stable to increasing, which is a positive sign.

Where we see the impact is primarily within transaction volumes from some larger enterprise customers in Messaging and both the Messaging segment, and to the extent we have large Messaging customers in SMB, where we've seen kind of volume reduction. Actually, commenting on the comparison you made competition or industry. I mean, in our industry you have several different companies that differ from each other in terms of the offering.

What we can see in terms of looking at the market in general, is that whatever growth rate that the company has had going back 2, 3 quarters, they have definitely decelerated from that level. The levels have been different. And our understanding is that we were not losing market share, rather, we see in terms of signing new accounts and growing with existing customers by adding new products.

We have continued strong development. We signed 37 new customers within Messaging. We sell large enterprise accounts the last quarter, and that's been fairly stable or there's a bit of seasonal effect, of course, but that's been fairly stable over the last 4 or 5 quarters.

And then maybe, I mean, just to close off, I mean if you -- as I said in my remarks, if you exclude the price negotiation impact, we would have had positive growth, overall, in Q1. And in Messaging, we would have had organic gross profit growth of plus 3%. So that -- I think you can calculate the impact from that KPI. We -- the look forward, we're not providing guidance. There's a number of puts and takes. Obviously, as you correctly identified, we have a couple of -- we have both the price negotiation and the one-off reassessment of traffic costs working in our favor in Q2, but it's difficult to call kind of how exactly Q2 will turn out that is pointed there.

[Operator]

Our next question comes from the line of Andreas Joelsson from Danske Bank.

[Andreas Joelsson, analyst]

So many questions, so little time. But I limit myself to a couple. On prices, if we continue there, you've said it's a little bit tougher towards the larger customers, while there are opportunities among the smaller ones. Can you elaborate a little bit of how large these price increases are that you implement? And if there are any new renegotiations coming up towards any of the larger ones?

And secondly, maybe for Laurinda, you mentioned the integration execution opportunities. Where do you see those opportunities? And what have you -- sort of what are your learnings from these couple of weeks when it comes to integration and what Sinch has been doing so far?

[Laurinda Pang, executive]

Yes. Why don't I start with the integration, and then I'll hand it over to Roshan on pricing and renegotiations. On the integration side, there's lots of ways to find integration. And we've acquired so many companies, not only over the past 2 years, but over really the last 15 or so years. And so the group has done a really excellent job with regards to some of the product integration and platform migration work.

But integration is complex, and it's much broader than just product alone. And by that, I mean, it spans across everything from infrastructure, core IT systems, people, culture, sales force integration relative to customer accounts management, incentive systems, et cetera. So it really is -- it's quite complex and does takes some time. So I would say that the platform migration has been underway, and we've seen some success there.

And we know it takes some time, and so we expect that to continue. But we've not reached our full potential or taking advantage of the acquisitions themselves as it relates to the growth opportunities and leveraging the product portfolio across all of the customers that we serve. So those are some of my initial observations, Andreas, and we'll be putting together some very structured plans and targets to achieve those growth opportunities.

[Roshan Saldanha, executive]

And maybe I can take your second -- your first question, second here, Andreas. I think the -- when we look at the pricing negotiation that we had with -- which affected our Messaging growth starting from Q2 2022. We said that this is a customer that's been with us for many years and we have grown with this customer. And therefore, we had pricing and margins that were maybe a little bit not relevant to the volumes that they kind of used as for delivering now, right?

Now when we look through our portfolio, and this is something we've commented earlier, we don't see any other large customers that have that situation. I think the other thing is that the macro impact has meant that many of our large customers have been looking closely at their larger suppliers and evaluating what opportunities there are to reduce prices. And if there were to be any such discussions, I would have supposed that they have already happened. And there's nothing that has had a material impact on us.

That being said, I mean, of course, individual price discussions will happen from time to time. But when you look at margins over the entire period that we have been reporting now 7 quarters on a pro forma basis. I mean, they continue to be stable, and they also continue to be stable within the individual segment. So I think that's another indication of kind of pricing stability.

Now on the price increase that we did, that was specifically in Messaging. It was late in Q1. So the full impact is not in Q1. It's going to be more in Q2. We haven't disclosed a specific percentage, but remember that even a smaller percentage increase on topline results in a 5x impact on gross profit because of our gross margin percentage being 20% in Messaging segment. And I think the other comment is that this is obviously not in our entire base. I mean this price increase was not done on a very larger customers, but rather on the next level of customers within Messaging.

[Operator]

Our next question comes from the line of Predrag Savinovic from Carnegie.

[Predrag Savinovic, analyst]

My first one is to Laurinda. And I know it's clear you spent quite limited time with the business so far, but I'm still curious if you're doing your time now or do your own diligence of Sinch have found certain improvements you could do in sales processes. Is there anything you can add on acquisitions and organizational structures or something of that kind because you've been running similar things at your previous employer.

[Laurinda Pang, executive]

Thanks for the question, Predrag. It's -- to your point, it's been just a few weeks or almost 2 weeks at this point. And organization as a whole has gone through a tremendous amount of change, including the sales organization. There's opportunity to leverage CRM differently. There's opportunity to leverage account planning collectively. There's opportunity to think about customer segmentation consistently across all areas of the business. With that, there is opportunity to leverage our digital channels as well, more effectively by ensuring that our product portfolio and pricing capabilities are loaded in the digital tools so that customers can self service.

So there's a number of opportunities across the go-to-market that I see as low-hanging fruit to improve and become more effective. But I would also note that it's low-hanging fruit to suggest to make the changes. And then there is some time where that has to soak in, that new discipline has to soak in into the organization. And the opportunity to have different types of conversations, more comprehensive conversations with our customers, takes a little bit of time for the sales cycle to work its way through and for revenue to ramp against that.

That being said, again, the digital channel piece, that should be a quicker time to value. So said a lot, there's definitely plenty of work for us to do and to execute differently.

[Predrag Savinovic, analyst]

And then could you double click a bit on the customer wins you've done? So you mentioned 50 in Q4, around 40 now in Messaging, and this is typically then the segment that serves quite large businesses, but without knowing anything of their size, this number doesn't give us that much at this stage. But what do you Roshan or Laurinda, what do you expect from these wins? What should we expect here?

[Roshan Saldanha, executive]

Yes. I mean, I think -- Roshan here. I think just a couple of comments maybe to give a little bit more color, what we disclosed is, of course, the number of customers. The way we classify an enterprise customer is when they are above a certain threshold, and that threshold bares a little bit per geography. But overall, it's around USD 3,000 in monthly gross profit. So at least that we have a potential to reach $3,000 in monthly gross profit at that customer, right?

And there is -- then that's a lower threshold. Of course, that number could be very high, I can indicate of individual customers, but usually there's a ramp-up time as well.

Now what we've seen historically is that our business performance within messaging is more depending on the base rather than on recent new adds or recent churn, and just a little bit also speaking to the stickiness of customers' products in our business. So because of the ramp-up time associated with the enterprise customers, they've been around a while before we make a material contribution.

[Operator]

Our next question comes from the line of Stefan Gauffin from DNB.

[Stefan Gauffin, analyst]

Yes, if I could start with continued question on the pricing in Messaging. So it's a mix effect price increases towards small customers and there you clarified that, that came in quite late in the quarter. So we should see a full effect in Q2. But that was again also price pressure within the large enterprise space. And can you comment if we have seen the full impact there? Or if you're still seeing continued price pressure from a large enterprise or -- so should we expect an improvement overall. So I'll start with that question.

[Thomas Heath, executive]

Thank you, Stefan, Thomas here, to try to give a little bit more color. The macroeconomic environment had some impact on our operating metrics at the end of Q4. And what we're seeing in Q1 is that it's been persistent, not necessarily worse, right? So just from that angle, it impacts the numbers in Q1, a bit more than in Q4.

Now having said that, Q1 performance is quite similar, overall, to Q4. And one of the things that positively contributes right, if macro is contributing a bit more on the negative side, one of the parts that is contributing positively is the price adjustments that we've made later during Q1 towards a sect of our Messaging customers. So you're correct that the full run rate impact of that is not seen in Q1, but we will see that in future quarters.

When it comes to larger customers, of course, we called out one particular customer back in Q2. We've had some other such conversations both in the Messaging and the Voice segment, which we talked about during the autumn. This is what we see again that we've seen now realize in Q1 rather than indicative in H2. So we're not necessarily seeing further deterioration, but with that said, of course, we don't really want to speculate on macroeconomics.

But from what we know today, we feel we have those negatives on a full run rate impact right now, at least. So hard to speculate all the future. Some things we know will improve. And of course, that alone should ease or should improve performance in coming quarters.

[Stefan Gauffin, analyst]

Yes. And then 2 very quick questions, if I may. So you're charging quite large integration costs each quarter. When are we seeing an end to the integration processes or these charges? And then secondly, the gross margin in the voice business is down 2 percentage points quarter-on-quarter. Is this due to pressure in the more high margin CPaaS business or are there other explanations?

[Roshan Saldanha, executive]

Yes. So I think -- I mean, on integration, I mean, what we're charging to integration today, primarily, I think that SEK 47 million in the quarter is the migration of the SDI platform and the LatAm -- the 2 platforms in LatAm and the acquisitions that we did there to our central Messaging platform, and the migration of the simple texting platform, MessageMedia centralized SMB platform. So those are the platform migrations that are ongoing. We do believe that within the next 12 months or so, we should be rounding off the majority of these platform migrations. And most of the other costs of integration, we actually take out normal OpEx including investments in new ERP platform, et cetera.

Now coming to your second question on Voice margin. That is primarily a result of -- as we see kind of 8YY impact as well as the renegotiation with customers that Thomas mentioned that as well as a mix effect. So it's really -- it's a several different things kind of playing into that in Voice. We have some products that have a traditionally higher margin that are not growing as fast, and then we have the enterprise business within Voice that is comparatively low margin, but growing much faster. So you kind of get a mix impact of that affecting the Voice margin.

[Operator]

Our next question comes from the line of Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, analyst]

A couple of questions, if I may. Starting off perhaps going back to North American Messaging, revenues fell off some 18% despite hefty tailwind from currency. And we know, obviously, this is coming from price negotiation with large big tech customers, of course. But can you give some more color on the volume impact in North America? And also if this price negotiations have spread to other big techs, given this large drop year-over-year?

[Thomas Heath, executive]

Thank you, Daniel. I think one of the reasons we call out this price negotiation or this change from Q2 is, of course, the financial impact. But it's also calling it out because it is quite unique. This is a large local company who we worked with for several years, but we're truly seeing some outsized growth at a comparatively healthy margin. And eventually, as the priority shifts also with our customers, they will look to improve and change and focus a bit more on profitability versus growth. That's the sort of underlying reason. But that run is quite specific to this one particular customer. So you shouldn't necessarily instruct it to others.

In terms of where we see discussions on price. It's contained mainly to larger customers, those discussions were happening during autumn, with the full effect during Q1.

In terms of volumes, it's again specific to this particular customer, which has a unique step up in how we cooperate. We're not really sure exactly where that ends up. As you know, we will get 12 months with a -- to made the price adjustments when we enter Q2, but we've also seen the volume decline, right? So annualizing part of that change. But you shouldn't really extrapolate this to any other customer, at least.

[Daniel Djurberg, analyst]

And is it possible to give any color on the underlying volume on the rest of the customer base in North America?

[Roshan Saldanha, executive]

I think, again, what we can see is that there is a trend among enterprises to kind of evaluate their cost ways and kind of optimize. And that means that -- it's also interesting and kind of we do see some customers kind of moving to our Email products or using our Email products more. They're looking for all candidates.

They're also looking at ways to kind of produce such points since SMSs come with a cost. So there's a number of kind of different ways that they are using to optimize their cost base. However, underlying that is a strong digitalization, as we continue to sign new customers and launch new use cases. But in the short term, there is a volume impact, right, as they kind of adjust their cost base.

[Daniel Djurberg, analyst]

Okay. Fair enough. And if I may, a question on the price increases you mentioned again, Stefan asked the question impacting quite late in Q1. Would it be possible to give any comment on the impact how it would have been a cost impact or a cost -- sorry, I think it had happened January 1 instead of late in the quarter on the gross profit growth in the quarter from messaging.

[Thomas Heath, executive]

I think we're unwilling to give any more sort of numbers on that. But I think other than to say that we're seeing a full quarter impact of macroeconomics, which was a partial impact in Q4 and one of the reason of offsetting this -- the changes. I think that's where we believe it will...

[Laurinda Pang, executive]

I think I would also, Daniel, if I may, I would just add, pricing is our lever, and we have to be very sensitive to what the market will bear. And so we will take appropriate action whenever we see the opportunity or if we need to or if our costs increase for whatever reason. So again, it's a lever, but as we think about growth in this business, we will be focused in on the opportunity to cross-sell and upsell our existing customers and to take market share.

So I understand the reason why you want to understand the impact of pricing, but just understand it's always going to become part of business as usual, but growth really needs to come through those other areas.

[Daniel Djurberg, analyst]

Perfect. And a super quick follow-up. Just on the finance cost from the interest cost outlook for the full year. Should we extrapolate on the -- what you saw in the quarter given that your prolonged financing go up until 2026? Or can you give any color on the interest cost?

[Roshan Saldanha, executive]

Yes. I mean, I think we have -- I mean we have an effective interest rate of 5%. I mean, that's of course bundled, right, and of different rates. I mean, I don't have the crystal ball for how the benchmark operation will develop. I think if you look at most of the banks, the things will decline later in the year, but again sorry, I don't have more information than that we shared. If that makes sense.

[Operator]

Our next question comes from the line of Daniel Thorsson from ABG.

[Daniel Thorsson, analyst]

Two questions. First one on the peers. We see a clear profitability focus and leaving growth ambitions behind obviously. Should we see that as a positive change in competition for you? Or is there anything else to read into that regarding mid-term growth in the market that there may be a risk that many of you have overestimated the sustainable market growth that is being adjusted now by those peers? And that's the first one.

And then the second one on the Email segment. Is the strong organic growth in the current quarter as a result of that product being a lower-cost communication channel than a text message. So when we see messages coming back, would that be a headwind for Email? Or is that really to overanalyze the strength there?

[Laurinda Pang, executive]

I'll try to answer some of it. And again, the guys can add in. First of all, I think it's super important that we all remember that since it's profitable and has been since day 1. And I think that's something that we're very proud of and we'll continue to be an important part of how we operate this business. That's first and foremost. So the competition that you mentioned certainly is striving for profitability, but it will be a long time before they get there -- given some of the language that they've shared with the market more broadly.

I don't think that their quest for profitability is because that we have underestimated the market demand and the market opportunity. I think, quite frankly, that it's an economic reality that all businesses are looking worse today. The profitability is important. It makes logical sense and so appreciate the fact that there's pricing for it.

Some of the actions that they've taken to achieve profitability or to step towards profitability, does benefit us quite honestly because they're having to take significant costs out of the business model, some of which has impacted customers. And what customers are experiencing that segregation of service, Sinch is able to take advantage of that, quite honestly.

And we service our customers in a way that is superior to what they've experienced with some of the competitors. And we -- while we have a focus on costs, certainly and will continue to do so. We have not had to take the dramatic changes or had not -- had to take the dramatic cost that some of our competitors have had to.

So a long-winded way of saying we're very proud of the profitability. Demand absolutely is still there, and we can take advantage of the challenging environment, that some of our competition has found itself.

[Roshan Saldanha, executive]

Did we answer your questions, Danny?

[Daniel Thorsson, analyst]

Yes, absolutely. That's great. And then the second one on Email strength.

[Roshan Saldanha, executive]

Yes, I think it's -- I mean, Email has been around a long time and is a viable option for many use cases in fact is a preferred option in many use cases. I think -- our belief is that from a long-term perspective, this is going to be about what delivers the best customer experience rather than simply about cost, right?

And in many cases, text messaging is a superior alternative in the sense that it is -- has a higher read rate, it's more immediate and also to deploy certain use cases like customer care would come through messaging, it's a more attractive alternative and which is, we believe, underlying our long product. So short-term levers in terms of cost, but I think the long term, it's more about how you enable customer experience mostly.

[Operator]

Our next question comes from the line of James Pavey from Bank of America.

[James Pavey, analyst]

So a quick question for you. I think earlier in the call, you mentioned most of the conversations that you had with your enterprise customers about pricing pressure happening in autumn. And the question is, have you seen -- can you give any color on what the completions being like for this year?

And then relatedly, a quick question, in FY '22, I believe your revenue -- 21% of your revenue was from your top 10 customers. If I look back to FY '21 on a pro forma basis, any indication kind of like the trend for the top 10 customers?

[Thomas Heath, executive]

Thank you, James. No, that -- we're trying to detect for -- as the world turned during 2022 and many businesses started to reassess their operating -- their ways of working and starting to address cost. And the use of communication is one of many cost issues that is -- have been reviewing.

We started to take notice of this, especially in our Messaging business and our Voice business during the autumn, and that's what we called out in previous earnings call. It takes a while for that type of dialogue to turn into something concrete. We think this has played out as we expected and it hasn't necessarily worsen.

But with the caveat that we never know what the future holds and how macroeconomics develop, we do think that it's playing out as we expected to impact our numbers, but we're not building backlog, if that makes sense. That was answering your first question.

[Roshan Saldanha, executive]

I think they don't want -- customer cooperation has been declining. So the top end share of total revenues continue to see decline.

[Operator]

Our next question comes from the line of Laura Metayer from Morgan Stanley.

[Laura Metayer, analyst]

I have 2 questions, please. The first one is, could you clarify the headwind from the discount to large customer in Messaging. Will it be fully in the base in Q2? What I'm trying to understand is whether that happened at the beginning of the quarter, in the middle or towards the end of the quarter. And if it's fully in the base, is it fair to assume that we should see positive organic growth for the rest of 2023 now that is behind you?

And then the second question is on the messaging adjusted EBITDA margin. Could you please give more color as to why it's down sequentially versus Q3 and Q4 last year. And how should we expect it to trend going forward, please?

[Roshan Saldanha, executive]

So I think on the first question, the price impact is from the April 1, 2022, Laura. So it's fully in the base after Q1. There is also a volume decline from these customers. So that's happening actually during the year and as we commented on it in the Messaging segment in general, that is all in decline.

So that obviously not relates, but the price impact is. I think we speak specifically to that, assuming this customer impact that is on -- in Q1, we would have had within Messaging past -- then passed off growth, we're not guiding for the coming quarters. And then your second question, Laura, if you...

[Laura Metayer, analyst]

It's around the adjusted EBITDA.

[Roshan Saldanha, executive]

Yes. And I think that is -- that falls back to the scalability both upwards and downwards in our Messaging business and we do have a seasonal impact where issue is -- and especially in Q4 tends to be stronger commercially active quarters for enterprises, and then we do have -- we currently see a weakening in Q1. Also, it's got to do with the number of working days. We do have short months in February and fewer working days as well. So I think that can -- plays into the margin.

[Laurinda Pang, executive]

And the final thing I would add is, Laura, is that again, we noted that there were close to 40 new customers in Messaging in Q1. We haven't seen the revenue impact thus far. That takes a little bit of time to ramp. So that means revenue will show itself up in subsequent quarters.

[Operator]

Our last question comes from the line of Mohammed Moawalla from Goldman Sachs.

[Mohammed Moawalla, analyst]

I had 2. First one, Laurinda, as you look at the business, you talked a lot about efficiency about kind of operating more efficiently, but also growing. So I'm just curious to understand, do you feel that is it just better integration and extracting perhaps more efficiency in savings or do you see the scope for the business to potentially shrink in size and drive more kind of focus -- to drive -- to deliver on that because obviously Sinch has gone through a lot of M&A prior to the last 12 months.

Second one for Roshan. I mean, obviously, cash conversion was still very strong last year. It's come down in Q1. Can you give us a sense of how long perhaps some of the payable effect or reversal will continue? And should we think of -- when you expect to kind of hit the run rate, the 40% normalized run rate. Is it something likely to be sort of in the second half of the year? Or is it more likely to be a 2024 event?

[Laurinda Pang, executive]

Mo, good to meet you. I think the essence of your first question is, do I anticipate or foresee any divestitures? The quick answer to that is no. The Sinch portfolio, I think, is very comprehensive and is poised to grow collectively, go forward. And in terms of operational efficiencies, or operational excellence, you can find that in lots of different places within the organization, within the same organization quite frankly.

So as we think about business processes, as we think about the tools and the systems that we use to operate the business, as we think about the amount of people we have facing particular functions or particular customers. All of that needs to be assessed and there's plenty of opportunities to do that. So that's what I'm talking about. I'm not talking about divestitures.

[Roshan Saldanha, executive]

And let me take your second question there. I think as you're rightly identified, we had a strong cash conversion last year in the rolling 12 months included in Q1. What we have believed, of course is that we should, in this business be able to generate a cash conversion of somewhere between 40% to 50% on an ongoing basis on a continuing basis. Now when we talk about cash conversion, we include CapEx, interest and tax, obviously, within an increasing interest environment. We do have negative impacts from that. Q1 also tends to be a quarter where we have slightly higher -- seasonally higher tax payments as we close out 2022.

And then finally, as you said -- as you identified, we do have decreased the account payables that I also included in my remarks. On the other hand, DSO continues to trend strongly. Now working capital can be a bit lumpy from quarter-to-quarter, but I believe that we will continue to generate strong cash for the rest of 2023, and we will continue to deleverage. And this will go up a little bit in the longer term from -- up and down -- longer term from quarter-to-quarter, but we're committed to that 40% less cash conversion, it's very much on the table for Sinch.

[Mohammed Moawalla, analyst]

Sorry, the last bit. The 40% is on the table for 2023?

[Roshan Saldanha, executive]

More than that, yes, more than 40% is on the table for 2023.