Sinch AB (publ)

STO:SINCH

Earnings Call Transcript 2020-Q2

[Operator]

Thank you all for standing by, and welcome to today's interim report January to June 2020. I would now like to hand the call over to your speaker, Chief Strategy Officer and Head of Investor Relations, Mr. Thomas Heath. Thank you.

[Thomas Heath]

Thank you, operator, and welcome, everyone. Good to have you dial in today's conference call discussing the second quarter 2020 results of Sinch AB. My name is Thomas Heath. I'm Chief Strategy Officer and Head of Relations -- Head of Investor Relations, and with me on the call today, though not, of course, in the same room, is our CEO, Oscar Werner; and our CFO, Roshan Saldanha. And with those introductory remarks, I'll hand the word over to Oscar.

[Oscar Werner, Chief Executive Officer]

Thank you, Thomas. So welcome to -- welcome again to this quarter report. And so we'll try to give you the information on the quarter and also answer any questions that you may have. So can I go to Slide 2, please? So this slide we've shown many times before. We are now up to SEK 6 billion revenue in the past 12 months and an adjusted EBITDA of SEK 708 million in the past 12 months, with the acquisitions that are closed, but not counting the ones that are not closed, 822 people and present in 37 countries. And what we do is customer engagement through mobile technology primarily in messaging, voice and video, where messaging is the largest. And we do some 40 billion engagements per year. We're serving 8 out of 10 of the largest U.S. tech companies, so a large portion of the West Coast's large tech titans are our customers. We believe this is a very interesting market. We believe it's a growing -- a global multibillion-dollar U.S. -- multibillion-dollar market. And we believe this market will continue to grow for the foreseeable future. And therefore, we're trying to position ourselves as one of the leaders in this space. We have been profitable since foundation in 2008. So we're very proud of that. We work very hard to keep -- obviously keep up profitability even during tough times. And we have had a solid growth since our IPO since 2015. So can I move to Slide 3, please? So we have, as you see, had a track record of profitable growth, and we focused both on organic and M&A-driven growth. In this quarter, we had a 43% in gross profit in Q2 2020 and a 55% growth in EBITDA, in our adjusted EBITDA. We focus on gross profit since the revenue has a lot of pass-through fees, and they vary between countries. So looking at revenues and this type of investments would skew -- skew your analysis, so therefore, we only look at gross profit both external and internal. And then this quarter, we obviously need to say that the acquisitions of Wavy, SDI and ACL Mobile will add significantly to our scale and profitability. You can see the impact both on the gross profit level in the yellow bar and on the adjusted EBITDA level on the purple bar on the trailing 12 months -- on a trailing 12-month basis on the graph. So as you can see, we're -- with these acquisitions, assuming closing, we're taking a major step up both in profitability and gross profit, and we think it also puts us in a very strong strategic position. Operator, if you go to Slide 3, please -- or Slide 4, please. And to put this in context, both the organic growth and the M&A side, we're only showing messaging and CPaaS here. We're not showing the figures for voice and video in order to make it a little bit shorter. But the messaging market is a -- on the A2P SMS side, the biggest part market and the market where the majority of the revenue is a $17 billion market globally. Other estimates vary between $15 billion and $50 billion. And the business use of SMS is continuing to grow. But then you also have very high-growth rates in next-generation messages like next-generation messaging channel like WhatsApp and RCS and Viber, KakaoTalk where you're seeing above 100% growth rates in the market. So this is a market which is combining the size and the profitability of the existing text messaging market and the high-growth and system of the next-generation channels like WhatsApp and RCS, which I think -- which we think is very interesting. The other thing that is happening in the market is on the CPaaS side. We're basically adding software on top of actually delivering the message or terminating the voice call to deliver various forms of software services, which may be an AI service, an NLP service, which the Chatlayer acquisition is an example of or maybe other forms of software that you add on top. And there, you charge more in a SaaS model where you charge a -- for those services a 90% margin, but -- because it's a full cloud service. And those markets are growing fast as well, ranging between 30% and 50%, again, depending on the various estimates that you may choose. Slide #5, please, operator. And as a consequence of this, we have a -- taken a playbook for profitable growth where we both focus on the connectivity side, that is terminating the voice call or making the video call or actually making sure the message deliver or the Software-as-a-service on top, which are the value-added services on top. And we focus on both of those. The majority of our business is on the connectivity side, even though we grow the Software-as-a-service side, both organically and by M&A. So let's go to Slide 6, please. And as you know, we have been making quite a few acquisitions lately. In this quarter, we have added 3 relatively sizable ones, Wavy in Brazil; SAP headquartered in the U.S., but large operations in Europe as well and also present in Asia; and ACL, the second largest player in India. So we feel that this quarter, we've really taken a stance of becoming the global player in this industry. And we're now a leader in both Europe, U.S., Latin America and India for the reason being the biggest message -- or one of the biggest messaging -- or one of the biggest messaging providers in all of these regions. And we believe no other messaging players -- player is that deeply entrenched in all these markets, and so we think we have a very strong position there, and we think that sets up very well for the future. So operator, if you go to the next slide, please, Slide 7. This is a case for the acquisitions on the -- to show you what happens when we do acquisitions on the technology and go-to-market side. So we have the strategy on scale and profitability, but also technology and go-to-market. In technology and go-to-market, we buy typically smaller companies that have a specific technology or go-to-market ability that we think we can scale globally. And one of those that we acquired a couple of quarters ago was myElefant. myElefant has a way to deliver what we call Rich SMS. It's basically some SMS with a landing page -- to mobile landing page. And they have a software so that people in marketing can actually create those messages themselves without any help from a developer. And we -- Sinch has [ customer ] Nationwide, it's a financial institution or bank, you may say, in the U.K.. When -- and then we took the myElefant service and pitched to the Nationwide. They had the best use case. So Nationwide wanted to do payment holidays for credits, so basically prolonging payment terms for credits to their consumers. And they wanted to find an efficient way of when that payment holiday or extended credit was ending, the term for that was ending, sending a notification and reminding people to start paying. They're doing this via regular mail. They're doing it via e-mail, and they were doing it via text message. But then they saw, all right, well, this service from myElefant or now Sinch seems like a really good way of increasing the engagement rates of our consumers so that more people actually start paying or take action when the payment holiday ends. They did a run here. They saw a 4x click-through rate compared with the bank and financial sector average. So the click-through rates on this particular message or this particular campaign was 4x what they have seen before on any other campaign. And it was 98% engagement rate. And that means when anybody clicks on the link, 98% of the people actually clicked on the next button in this message. So you can see the first button here is "If you can start making a payment again." So 98% -- 91% of the people that click through to the message actually clicked on it. Nationwide believe this is an extremely successful campaign, and they believe they can -- they really increase the engagement rate and they increased the number of people who took action, and therefore, it makes it easier for them to start getting payments again or putting the people on a new payment plan, basically. So very successful campaign. To the left here, you see how the messages actually look when you get to the link and landing page, and you can see how interactive this becomes compared to a normal text message with full graphics, action development and things like that. So this is very much representing the move you see in this industry are moving from simple texting messages to an interactive message where enterprises have a much higher value, but they also require more software, and that means that we can charge a higher fee for transaction that we could if we just send a normal text message. So that's one example of what we're doing here with the new acquisitions. If we then, operator, move to Slide 8, just a short reconnect of SAP Digital Interconnect that was executed during the quarter. So the deal rationale here is we're getting close to 1,500 enterprise customers and some of the world's most valuable brands, and it diversifies our customer base. It's a highly accretive deal, as you've seen, so it fits our scale and profitability category. It significantly strengthens our U.S. presence. We go from some 100 people in the U.S. to 200 people in the U.S. We also get strengthening in Asia Pacific and Europe. And it gives us very strong operator relationships and as data sets' trusted vendors to hundreds of carriers around the globe given that SAP also have a P2P and operated business basically. So we think this data is very good. We're now in integration planning. We're going through and hoping for closing in Q4. And we're targeting closing in Q4. We're going through integration planning, and we're very satisfied with what we have seen so far. So it's on track, and we're working hard in order to get to closing here. And then operator Slide 9, please. And so ACL Mobile, a little bit of a recap. So ACL Mobile is the leading cloud communications provider in India and Southeast Asia. I think they're #2 in India by volume and on messaging. They've got a very strong customer base, with a leading position in banking and finance. So a large portion of the private banks in India are now customers of ACL and, soon to be, Sinch. They've got very significant scales, with 47 billion business messages handling in the past 12 months. And if you can compare that to Sinch's 40 billion, you can see that the volumes in these type of markets are huge. You can also see by looking at the revenue numbers, the revenue or gross profit per transaction is obviously much lower. But entering into these type of markets with a very high mobile-first -- or a very large mobile-first population where the number of transactions is very high is obviously very interesting for any company that wants to be a leader in messaging globally, and that is our goal. And therefore, we believe India is a very strategic market to be in. And they have 288 employees in India, UAE and Malaysia. This gives us significant scale in one of the -- in the world's second largest mobile market, more than 500 large enterprise customers. It's also a highly accretive deal. It's a scale and profitability. We get direct operator connections in India and the competitive cost structure for further expansion in Asia. The direct operator connection in India are important, obviously, to both our Asian and our -- and to our U.S. data customers who all have large volumes into India. That really truly adds to our delivery network in those regions. So operator, next slide, please, Slide 10. So India -- India's just a little bit, you know this, but the second largest mobile market in the world, 1.2 billion mobile subscribers and a 50% smartphone penetration. It's interesting that we see a lot of innovation coming out of India now. So with the world's highest data usage per smartphone at 9.8 gigabyte per month. And it's also a very rapidly digitizing economy, second only to Indonesia, if you look at various reports. It's also the world's largest WhatsApp market, which is interesting in -- when the new services come. So from a consumer perspective, it has 400 million users in July 2019 for WhatsApp. So it's a very active WhatsApp market also in terms of business messaging. All right. Slide 11, please, operator. So with that intro, if we look at Q2 2020, we saw gross profit rising 43% to SEK 460.3 million compared to SEK 321 million the year prior. We saw adjusted EBITDA rise to 55% to SEK 176.5 million compared to SEK 114.2 million the year prior. And adjusted EBIT, if we exclude acquisition-related amortization, which is noncash flow- impacting was SEK 161.7 million -- so as you can see, the -- and profit after tax being SEK 37.7 million. And the large portion there is obviously the acquisition-related amortization. And we also -- we're happy to see that our strong cash flow, EBITDA to cash flow, that strong ratio is continuing, and that's what you -- that's what you obviously can see on the adjusted EBIT, excluding acquisition-related amortization. Organic gross profit grew 24% in local currency, so excluding the currency effect. COVID-19 was causing reduced voice traffic and length and sales cycles. But you also see that the high scalability in the business, you can see -- truly see this when you see the message volumes going up. You can also note that EBITDA grows faster than gross profit despite increased OpEx to handle the greater business volumes. So that's a little bit of the headlines. And now I'll go into a little bit more of the detail. So operator, Slide 12, please. So the key growth drivers in this quarter is volumes -- volume growth and new use cases with large U.S. tech companies, as we have seen many quarters before. We saw the acquisitions of TWW, myElefant and Chatlayer contributing well to growth. And then we have a very strong performance in general in Brazil, and it's the third gross performer here. And we're growing both with new and existing customers. So Slide 13, please, operator. We're investing in 4 areas. We're investing in organic growth. So we have this two-pronged agenda of doing M&A and organic at the same time. So we're continuously focusing on driving the organic growth and driving that upwards. And I'm happy to see that we have had a good organic growth the last quarters and also this quarter. And we're seeing a continued investment in platform scalability, and we're seeing support -- supporting growth with existing customers. Just the sheer volume growth obviously takes some investments in order to keep up with. And we see a greater focus on new gen and new sales and continued increased focus on that each quarter-by-quarter. Operational efficiency is a big area. So we've got something in COGS efficiency and internal automation. So we see a lot of the initiatives that we kicked off 12, 18 months ago are now coming up in automation. So very happy to see that that's coming out now in Q2, Q3, Q4 of this year and also seeing a client self-service tools. New technology, a large area as well. Software on advanced, interactive messaging, new channels like WhatsApp and RCS. We're focusing now on a cross-channel Conversation API, so our customers can have 1 API and then reach every channel in the market. We're investing in RCS-as-a-Service and SMSF for mobile operators. That's the partnership we announced with Ericsson. And integration is a large focus area, of course, so both on TWW, myElefant and Chatlayer, where we're -- they're closed and are focusing on action doing the integration. And then you have ACL expected to close in Q4, SDI pending regulatory approval and Wavy pending regulatory approval, and there we do integration planning, but obviously not integration or execution. But that's a big area and will be a growing area, of course, going forward, and we're right now working hard to set ourselves up to do this integration in a good way. So operator, Slide 14, please. The messaging performance in this quarter is very good. U.S. tech companies continue to fuel our growth here. We also see generally in market the rising volumes as businesses shift from e-mail to mobile messaging. myElefant and the TWW are included since mid-October 2019 and Chatlayer since April '20. And we see investments in software for next-generation messaging. But in general, if you look a little bit closer to numbers, the growth in gross profit and EBITDA in this quarter in messaging alone is very strong, showing the strong performance in our core market and core product. Operator, Slide 15, please. So you see the rising message volumes. As you see on the graph, we had a spike in early '20, and we said in the -- I think it was March 2020, and we also noted there, we thought that was COVID-related early. And that was going to go down. So we saw that spike going down as we reported at the end of the Q1 report. And we saw that happening, but now we're seeing also message volume picking up again in the tail end of Q2, which we think is good and strong. And we see 58% growth in transactions and 32% growth in gross profit in the messaging segment. So operator, Slide 16, please. Gross profit per transaction, so OpEx per transaction, gross profit per contraction. This is kind of a graph we're monitoring closely. Obviously, you want to see this a little bit like a crocodile gap or crocodile mouth. In the end, we want to see them increasing. Over last quarter, we have seen that. And this quarter, we see that graph being on the solid level or even increasing a little bit. And this is obviously how we try to manage our OpEx to our gross profit. And as you know, we're trying to always keep our OpEx in line or at a slower growth with the GP. And we sure have been able to do that this quarter. You can also see the reduced OpEx per transaction due to economies of scale. All right. Operator, Slide 17, please. This is the other graph we're monitoring closely. It's in our core business, the messaging EBITDA per gross profit. As you can see here, we're dropping close to 50% of our gross profit down to EBITDA. So this truly -- I think this is a truly testament for the scalability of this type of business. Being able to, in the cloud business, drop 50% of the gross profit down to EBITDA is a strong testament to our scalability and efficiently of running this operation. Slide 18, please, operator. Then coming out to the headwind areas in this quarter, as we reported in Q2, we saw strong headwinds in voice and video. Voice and video are 2 segments, partly it's verification, which is trading fairly well; and then it's the actual ride-hailing segment, which, obviously, during lockdowns and COVID has a strong headwind. We saw that in Q1, but then the COVID effect was only 1 quarter. And now in Q2, we see a full quarter's effect of the COVID impact. And then you can see the gross profit levels and the revenue levels and the EBITDA levels on the voice and video segments to drop. And obviously, this is not what we want to see, but this is, as you know, a smaller portion of our business. So -- but this is the area which is strongly -- most strongly affected. And we expect this to turn back up as the COVID effect releases and as we are able to sign the new customers. We should though say that we have positive underlying trend in the number of verification business. So this is, as I said, 2 parts, the number of locations doing well while the ride-hailing segment, obviously, much more negatively affected. Here, we are increasing OpEx to ensure quality and service and adding functionality. And we're continuing on a solid level here in order to make sure we have the solid -- the quality as message -- as core volumes come back. So operator, Slide 19, please. So we also have headwind in the operators segment. We see lengthened sales cycles with lower operating investments due to COVID-19. We also have currency headwinds, and we also signed a very attractive 5G SMSF deal with Ericsson. This is to enable IoT or wake up IoT devices in the 5G networks. The best way to do that is via text message. And therefore, we, together with Ericsson, we have developed the software. And together with Ericsson, we're taking it to market to the largest carriers in the world. And here, we see a great future potential. And therefore, we're taking more investments here than normal because we think this case is interesting as such. We're obviously not happy at all with the negative EBITDA impact in operator, and we're working hard in order to turn that trend. That said, I'll leave the word to our CFO, Roshan Saldanha. So operator, if you go to the next slide, please. And Roshan, if you could please continue.

[Roshan Saldanha, Chief Financial Officer]

Thank you, Oscar. Thank you, Oscar. Good afternoon to all of you taking time on this summer day. And some of you even from your holidays to join us on this call. Happy to present some comments on the financials for Sinch in this quarter where we continue to have enterprises digitalize their communication. Operator, please turn to Slide 21 for the condensed income statement. Consolidated net sales grew by 38% in the quarter to SEK 1.6 billion. The growth rate in the quarter was positively affected by the previous acquisitions of TWW, Chatlayer and myElefant and as well as the depreciation of the Swedish krona primarily against the Euro pound and dollar. The organic growth of net sales in local currency was 27%. We see a strong continued development of adjusted EBITDA per share, which was SEK 2.9 for the quarter versus SEK 2.1 for the same period last year. On a rolling 12-month basis, adjusted EBITDA per share increased to SEK 12.6. For the messaging segment, especially adjusted EBITDA, was a record high at SEK 214 million for the quarter versus SEK 112 million last year and SEK 177 million in Q1 of 2020. Adjusted EBITDA in the other segment was also decreased or affected negatively by SEK 12 million due to increase in provisions for social insurance costs related to the company's outstanding long-term incentive programs. In addition to that, in adjusted EBITDA, we also have a negative ForEx effect of SEK 11 million, which were, of course, from quarter-to-quarter depending on the foreign currency movements. Moving to EBITDA, which came in at SEK 146 million this quarter. It was -- it is reduced by nonrecurring items of SEK 31 million compared to adjusted EBITDA, of which, SEK 26 million are acquisition costs related to the recently announced acquisitions, mainly SDI and ACL. EBIT came in at SEK 88 million versus SEK 73 million in the same period previous year. Acquisition-related amortization, which does not affect cash flow, was SEK 43 million. The amortization relates mainly to planned amortization of acquired brand customer and operator relationships as well as software. Adjusted EBIT excludes both items affecting comparability and amortization and of acquisition-related intangible assets since these do not affect cash flow. Hence, we consider adjusted EBIT to be a better measure. And it amounted to SEK 162 million this quarter versus SEK 104 million same period last year. Operator, moving to Slide 22. Slide 22 shows a bridge explaining our underlying gross profit development. Significant part of our revenues are passed on as cost of goods sold to mobile operators. We pay them to send messages and place calls, but the rates they charge very greatly between markets. Since pass-through revenues do not contribute to our profits, we focus almost exclusively on gross profit when we assess and steer our business. Changes in our gross margin often reflect changes in geographical mix rather than underlying performance or competitiveness. And over time, we aim to improve gross margins through also delivering additional value-added components to customers. The bridge explains the different components in our gross profit growth and organic growth. Consolidated gross profit rose by 43% during the quarter to SEK 460 million versus SEK 321 million last year, same quarter. Positive exchange movements contributed were explained, SEK 4 million or roughly 1% of this increase. The acquired companies, which are then TWW, Chatlayer and myElefant, contributed 19% of this increase. Therefore, organic growth in gross profit in local currency and comparable units was at 24% for the quarter. When looking at the segments, gross profit growth in the messaging segment was particularly strong, coming in at 59%, of which, organic growth in local currency was 35%. Acquisitions contributed 23 percentage points and currency fluctuation is an additional 1 percentage point. Adjusted EBITDA over gross profit in the messaging segment also came in at a record of 52% for the quarter as we benefit from increased scale. Gross profit declined by 40% in the voice and video segment. And I think Oscar has talked about sort of the reasons behind that as well as 13% in the operator segment, which are both affected by muted demand due to the ongoing pandemic and the related economic [ result ]. Operator, please turn to Slide 23. On Page 23, you see a summary of the number of resources at Sinch. We continue to invest for continued growth. And Oscar already talked about the main areas of resource addition, which are driving internal operational efficiency and quality, increasing our sales and marketing efforts as investment in new technology, and finally, of course, integrating the acquired business. I would just briefly touch upon the size of the investment and what we believe will deliver growth during the coming periods. Our headcount is distributed in many different locations across the globe, but the main locations for us are Sweden, the U-S-A and Poland in U.K. being other significant locations. We have grown headcount in the company with 47% during the previous 12 months. Note that these numbers are quarterly averages. And at the end of Q2, we ended at 822 FTEs in the company. A lot of the work that has been done is, of course, to support our gross profit growth in the current periods, but there are also investments, among others, in conversational messaging using channels such as WhatsApp. These investments are taken through our income statement as OpEx, and we have very limited capitalization of resource costs, which we believe will be prudent. Please turn to Page 24. On Page 24, you will find a bridge from adjusted EBITDA to cash flow before changes in working capital. To explain the effects between these items, we see a delay in paid taxes in certain jurisdictions, primarily in the United States, benefiting short-term cash flow. In the quarter, we have significant acquisition costs related to the announced transactions of SDI and ACL as well. Despite this, we see a cash flow generation from operations of SEK 127 million or 72% in relation to EBITDA -- adjusted EBITDA. Please turn to Page 25 for the cash flow statement. And the cash flow statement, the cash flow from operating activities was SEK 264 million, which is aided by a strong swing in changes of working capital. Change in working capital can fluctuate from quarter-to-quarter because many of our customers maximize their liquidity and also that our rapid growth consumes working capital. So in this quarter, we are especially aided by the low growth in the voice and video and the operator segment, which actually helps our working capital position. Due to muted growth in -- yes, and of course, then we also did the new share issue this quarter, which we're very thankful for the continued support from the shareholders, contributing SEK 700 million to fund announced acquisitions. Moving on to Page 26. Just to briefly summarize the status of our ongoing acquisition and integration processes. In the case of Wavy, SAP Digital Interconnect, we are pursuing the regulatory approval and performing other steps. I mean in both of these cases, there's also carve-outs to be performed. So that is also being worked upon in parallel. And we hope to be able to close both of these during the second half of 2020. In the case of ACL, we're expecting to close in the current quarter in Q3. And then, of course, once we have closed both SAP and ACL, we will review our synergy assessments that were done preacquisition as well. In the acquisitions done earlier and already closed such as TWW, myElefant and Chatlayer, we're happy to see continued progress in all of these businesses. TWW, I think, had a strong gross profit development also in Q2, contributing SEK 48 million in gross profit this quarter. In the case of myElefant, we've actually completed the first stage of the U.S. launch and continued integration with Sinch platform is ongoing. And in the case of Chatlayer, we continue to work on the integration execution into the Sinch platform. Moving to Page 27. Sinch had a positive cash position at the quarter end of SEK 1.5 billion. I would like to state that the net debt-to-EBITDA is ended at 2.1x or negative 2.1x. The financial targets for the company are unchanged from what we have previously stated. We aim to grow adjusted EBITDA per share at 20% per year and keep net debt to adjusted EBITDA under 2.5x. Operator, please move to Page 28. Page 28 summarizes our financial leverage pro forma upon closing the announced acquisition. As announced, we believe that our underlying business performance will enable the timely deleveraging, enabling us to meet our financial goals. I'm happy to report that at the end of Q2, our pro forma leverage is already below our financial target, although this is subject to future business development and current fluctuation until the time of closing these transactions. We -- at current levels, we expect pro forma net debt over adjusted EBITDA upon closing all of the transactions to be at 2.2. With that, I would like to hand back over to Oscar to summarize today's presentation. Oscar?

[Oscar Werner, Chief Executive Officer]

So thank you, Roshan. Operator, if you could move to Slide 29, please. So the key priorities ahead are obviously -- I mean continue to grow with U.S.-based global tech companies, obviously, a key focus for us. We're also increasing our investments to broaden growth across the base in many different areas. We've done so both organically over the last quarters, and obviously, to a large extent, M&A-driven. And that's an initiative which we'll focus a lot on going forward and have been focusing a lot on. Closing of pending transactions is obviously key and integration planning for ACL, SDI and Wavy, and obviously, starting execution once those transactions are closed and right now focusing on the prior integration of the prior -- the transactions that have closed in prior quarters. We're also continuing to strengthen our connectivity offering in various areas, both on the voice side and on the messaging side. We're investing in SaaS products for advanced next-generation messaging in order to catch the growth curve that is obviously coming. I mean you only need to look at the nationwide case to understand that pretty much any of our customers is -- will have benefits from moving to the next-generation messaging. It will improve their business performance, and it will improve our ability to charge them because they will need more software and more services in order to move there. That said, I want to thank you all for listening so far. And I want to open it up for questions. So operator, are there any questions for us, please?

[Operator]

[Operator Instructions] The first question is from the line of Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, Research Analyst]

Congratulations to strong Q2. Question is to Oscar first. You mentioned some messaging volumes were taking up again in the tail of Q2. I guess that came from societies opening up and so on. And do you also have seen this in the end for voice and video, i.e., has ride-hailing, scooters, renting, et cetera, coming back a bit? If you could comment a bit on that as well.

[Oscar Werner, Chief Executive Officer]

Well, in voice and video, we see the verification business trending fairly well, I should say, and that has been during all of Q2 -- all of COVID. Ride-hailing a bit, but so far, not the major effect, I would say. So yes.

[Daniel Djurberg, Research Analyst]

And if I may, another question on -- you mentioned work on the unified cross-channel API. Can you comment a bit more on this project for your -- and how important it is if you consider yourself an early mover or ahead of your Norwegian colleague, et cetera, and the technology risks involved, et cetera, would be great.

[Roshan Saldanha, Chief Financial Officer]

We believe this will be a very important project. We're fairly well advanced. So we're now trialing it in what we closed -- what we call as a close-bid trialing with a set of customers and then coming closer to a launch. So we're well-advanced. We think it's a very important project because we believe that, as we said many times, for companies and customers will want to reach their consumers via any channel, where the channel where the consumer is. And obviously, they don't want to make 10 integrations to someone like us to do that. They want to have 1 interface. We think this is one of the bread and butter APIs going forward. As compared to the market, I think we are not an early mover, not extremely late, maybe in the mid in this area, but there are a couple of companies like -- couple of companies like Twilio are out before. On the other hand, we think we are learning from what we've seen in the market and learning from the experience that we're doing and coming out with a solid interface.

[Daniel Djurberg, Research Analyst]

Okay. And would you need additional functionality, you think, e-mail or payment or whatever to put in this cross-channel API or are you quite satisfied with what you have?

[Oscar Werner, Chief Executive Officer]

I'm never satisfied. You should know that by now, right? So -- so do we -- I believe there are -- I believe the basis is definitely there. I believe there will be new channels to be added. E-mail or not, I won't comment on, but I definitely believe there will be new channels, and there are multiple channels. And so yes, we'll focus on adding channels to it. I also believe that there are new functionality that can come, and that can come both in the terms of payments is a very interesting area where when enterprises want to do payments in the messages or 2 payments in the voice call, so integrating that in a seamless way into your APIs is interesting. We're not going to be a payment provider, but integrating those type of services. That's definitely an interesting future area. And there are also other interesting areas, such as adding more machine learning functionality into those interfaces or adding more software on top in order to let our customers code less. So I believe there's going to be a continued development of new solid features into these interfaces and other areas.

[Operator]

The next question is from the line of Predrag Savinovic from Carnegie.

[Predrag Savinovic, Research Analyst]

First one on the Voice and Video segment. And I understand your customers in this segment are having a tough time, and you would clearly see why volumes should be down Q-o-Q. But I'm a bit curious here on the gross margin. It comes down by quite a bunch in year-over-year terms as well while if we look in volumes or at least net sales terms year-over-year, it's pretty flattish. It used to range well above 30%, now at 24%. Can you explain a bit on what happens with the margin here in this segment in this quarter?

[Oscar Werner, Chief Executive Officer]

Roshan, would you care take that one?

[Roshan Saldanha, Chief Financial Officer]

Yes, just coming off mute here. So I'm happy to comment on that one. I guess, sort of when you're looking at the Voice and Video segment as a whole, I think you have to look at sort of the -- as we always say, I mean, we have the mix between our products verification, number masking, which are the 2 primary products we're selling in this area as well as the mix between sort of the markets where we are selling that, right? And just as we always comment, I mean, gross margin is a factor that very often what the operators charge to face calls in different markets. And therefore, it's more related to that rather than to our own sort of delivery capability.

[Predrag Savinovic, Research Analyst]

That's super. And then another question, then we've seen in several industry reports here on the messaging side and on communications in general that discussed that the adoption of messaging and conversational services as a complement to customer support in general has increased by quite a bunch in this environment. I'm wondering whether you see this adoption, too. I mean you did mention the Nationwide example, but I'm sure Chatlayer, TWW, myElefant as well, there should be more. And what kind of trends do you see here for the services that you have?

[Oscar Werner, Chief Executive Officer]

No. That's a very good question. No, we definitely see it. We see that in -- obviously, in the Wavy acquisition. They have a lot of business in that area. So they have a very fast-growing business primarily focused on the customer care side. On SDI, we actually get a unit which is an SDI software unit. It's not really what you talked about, but we see the combination of the Wavy Chatlayer and that unit to be very interesting, but it's actually a full contact center in the cloud. And then we see on the Chatlayer side, large demands on their side, but also large demand on from our existing customers of the Chatlayer service. We just came off a call from the ACL people who wants to sell Chatlayer, for example. So it's very interesting in that area. And I think it's driven very, very -- if you just drill it down what it is. I mean a call to a compact center costs around about $5, and you can automate that via -- and you can do that via messaging. And then you can -- and messaging is very easy or it's very suitable for automation because you get the information in the short text format. So basically, you can maybe automate 50% of the incoming calls and, therefore, take down your cost in your call center or contact center to a large degree. So I think that's a very interesting area going forward for many of these businesses. And that's kind of the core area, but then it's also the wider area, which is well doing what -- that's kind of handing incoming calls to contact center, right, where I think a lot of the core volumes will move from voice calls to messaging actually in the core contacts in the world. But then you got the wider area, which is more the Nationwide example, which is they want to do customer communication. How do they do that? And you may do proactive communication, sending out the message to inform somebody in order to avoid the call or to actually to drive the calls into them, and that type of combination is not really contact center per se, but it's customer success, right, in the wider area. And that's also an area we see a lot of activity and also a lot of interactivity between the voice business and the messaging business. So 100%, correct. We believe a lot in this area in general.

[Predrag Savinovic, Research Analyst]

That's very encouraging. And again, on the messaging side here, very impressive numbers here from the segment. Can you say what kind of traffic you're seeing growth in terms of maybe by use case? And I know in Q1 there was discussions on airlines, some from health care in general in the U.K., for example. But now in Q2, what is the big driver in year-over-year terms? Because I can assume that airline traffic has come down potentially also from the healthcare side. 2-factor authentication, e-commerce related, can you share some flavor here?

[Oscar Werner, Chief Executive Officer]

Yes, I mean, it's obviously a lot of transactions. It's a little bit hard to know. But the major drivers here is obviously it is, like we said, I mean, the U.S. big tech, but the U.S. big tech is then -- it may be in turn selling to other companies. So -- but U.S. big tech is definitely one. Then it's obviously banking, banking and finance going strong. And you also have the e-tail -- the e-tail sort portion is obviously also picking up very well. That's the 3 segments I should probably highlight as of today. Yes, that's the 3 larger growth drivers, I think.

[Predrag Savinovic, Research Analyst]

All right. And then finally maybe one for Roshan. In terms of the negative SEK 11.4 million revaluation that impacts EBITDA. And I'm aware the monthly valuation of the balance sheet happens, but I'm not fully grasping what creates this revaluation item impacting the fee here.

[Roshan Saldanha, Chief Financial Officer]

There's 2 -- I think there's 2 items. So just we separate those out, right? I think -- and these are 2 items affecting adjusted EBITDA. I think, firstly, one is sort of as the stock prices developed during the quarter, where every month we're doing an evaluation or every quarter we're doing an evaluation of all sort of social insurance costs related to the outstanding options, long-term incentive programs, where we have such social insurance costs in certain markets, and we make a provision in our books for that. And obviously, given the strong share price development, which we're, of course, very happy about. But that leads to a quite large sort of post into -- affecting adjusted EBITDA this quarter, which was around SEK 11 million. In addition to that, there's another, I think, around SEK 11 million, which we talked about, which is sort of revaluation of foreign currency. And that is, again, a recurring item that does come every quarter. There's 2 parts to that. One is the -- as we pay sort of the accounts payable and receive money from customers, there's a difference in the foreign currency valuation between what we -- what we have on our books and what we get in, and that's sort of all realized gains and losses. And then the other part is unrealized, because everything that's on our balance sheet, we need to revalue at the end of every quarter as well as for the current exchange rate. And the combination of those 2 is another sort of negative bit of SEK 11 million in this quarter. So there's 2 of them.

[Operator]

Next question is from the line of Ramil Koria from SEB.

[Ramil Koria, Analyst]

Just a few questions from my side. Starting off in the very short-term here on the OpEx side. This is the second quarter in a row that you commented you are going to halt recruitment to some extent. I can imagine that you have some lag to that. Some processes are already underway in Q1. But how should we reason now or how should we reason now going into Q3 and onwards on the OpEx side given employee benefit expense being such a large part of total?

[Oscar Werner, Chief Executive Officer]

Yes. You're correct. I mean yes, you're correct about the -- yes, it has a lag. So we did much more conservative recruiting in Q2 than we were in Q1. But obviously, the people coming in, in Q2 were the ones we actually recruited -- signed in Q1 and Q4 and Q1. So I mean there is that type of lag, so you're 100% correct about that. And what we will do in our strategy is, obviously -- I mean seeing the COVID effects and riding those out and understanding those. And therefore, we wanted to be conservative in making sure we can continue to deliver good numbers. As the months pass by now, we feel gradually more and more secure about what do we believe the COVID impact will be for us. Even though it's hard to judge what is the second wave, what's going to happen with the long term, economic downturn, upturn, whatever. Obviously, for us and probably for you as well, hard to judge. But that is the strategy. I mean keeping it tight until we see the effects and then setting a new strategy after that. We're still at that stage. So we're still holding tight, but we're then obviously specifically releasing some OpEx for integration. We cannot do this amount of -- or cannot do this amount of M&A without actually taking care of the acquisitions once they come and making sure we can reap the benefits out from synergies, et cetera. So there, we have 1 -- we've made 1 round, together with the Board, of releasing a set of OpEx. Long term -- or medium term, I think you should think about we will match our OpEx to our gross profit development. So we will -- as long as we see growth, we will let OpEx trail the gross profit development. If we see weaker growth, we will keep OpEx tighter. So that's very much our strategy, along with the lines of the -- or the gross profit per EBITDA -- or EBITDA per gross profit type of growth and keeping that at base or at -- we've been around 45% to 50%. And that's our strategy going forward as well. So as long as we hit and continue to hit our OpEx targets, then we'll let up -- our gross profit targets will continue to trail OpEx to that. Was that clear?

[Ramil Koria, Analyst]

Clear. Yes. Yes, super clear. Just a follow-up on that. I mean shorter term, if you do halt investments -- and I reckon there's nuances to being tight on recruitment. If you do, say, halt recruitment in the shorter term, and you obviously have a tailwind with especially U.S. big tech, presumably, you'll see a margin expansion in the coming quarters unless you sort of start unwinding. You being tight on the recruitment side is -- or am I sort of thinking -- am I missing...

[Oscar Werner, Chief Executive Officer]

No. Yes, you're correct. You're correct in [ see -- and yes, ] in practice. On the other hand, we're then saying, all right. When we see the volume increase with those areas, what do we need to support? We have a discussion with the Board and saying, what are the investments we needed to take in order to support the growth and then we kind of release smaller chunks in order to support that growth, and that's very much focused on near-term gross profit growth, if you will. But yes, you're correct. On the other hand, I think maybe the more important one is to kind of -- that we're actually trailing OpEx to GP in the longer term. But you're correct in that sense, yes. And then you have -- then as you need to say in that context, you have the M&A playing in as well, right? So -- where it's, okay, we need to take care of those. We need to reap the synergies, so therefore, we need to be aggressive on that side even though we're conservative on the other side, if you will. Which will also, of course, skew the short-term picture a little bit because -- yes, so you just don't come quarter 1, basically.

[Ramil Koria, Analyst]

Yes. I see we're running out of time, but let me ask a few more, if that's fine. Just on the transaction volumes, in Q1, you were quite clear that March was an exceptional month. We're seeing a pickup now in June. Should we consider that fair to extrapolate? Or was there anything extraordinary in that number?

[Oscar Werner, Chief Executive Officer]

I would say -- I mean June was a good month. So it depends what you extrapolate. But what we're seeing -- we're expecting volume to increase in the trend that we have seen before in the more -- in a little bit more long term, yes. But then of course, extrapolating, it's a -- it depends what point you mean. But we don't see anything specific get weird in June.

[Roshan Saldanha, Chief Financial Officer]

I don't think we should take a lot of conclusions out of 1 month's traffic trends.

[Oscar Werner, Chief Executive Officer]

No. That's [indiscernible].

[Ramil Koria, Analyst]

Okay. And then on the U.S. big tech side, could you say anything about share of wallet with your biggest accounts right now? And perhaps if the growth we've seen in the last few quarters here is driven by a larger share of wallet and how much is driven by growth with the customer as such? Any flavor on that would be very helpful.

[Oscar Werner, Chief Executive Officer]

Flavor is both. I think we are both growing with the customers as their volumes are growing. But we also see opportunities, and -- but we're also growing share of wallet. And we see that share of wallet, it's possible to continue to grow with share of wallet. I mean these companies are extremely large. Like I said before, I mean just the 5 largest is the same size as the entire German stock market. So it would be to have every single German listed company as a customer and they would all be heavy customers of your users -- of your services. And that's only the top 5, and we're talking 10 here. So very, very large companies. There are definitely room to grow, but it's obviously hard fight for any revenue dollar or gross profit dollars that you get. I mean this is also very well-known brands and competitive situations.

[Thomas Heath]

I think we'll need to move on to other questions from other askers, if there are any more in the queue? Then we have some on the conference -- on the web call as well.

[Operator]

The next one is from Fredrik Lithell from Danske Bank.

[Fredrik Lithell, Senior Analyst]

Yes. My questions have been answered. I hope you have a great summer. I can say that.

[Operator]

The line of Predrag wishes to ask a question again.

[Predrag Savinovic, Research Analyst]

I have 1 follow-up on the partnership with Ericsson. I think in this report, you make quite a number of this more so than you've done before on the partnership on 5G SMSF. And then I think when you first announced this, it was a bit vague on what kind of economic value you would make here. And now you're sounding kind of bullish on this. Have you gotten more clarity on this side as you do seem more optimistic on the generation you can make? Can you say anything on how this partnership is structured and how that will impact you financially?

[Oscar Werner, Chief Executive Officer]

Thomas, maybe you want to answer this. I think you're a little bit closer to the people delivering this.

[Thomas Heath]

Absolutely. I think what we're seeing, generally speaking, is a very positive and good collaboration with Ericsson around this project. And I think it's clear that Ericsson is a leader in this space doing very well. So in that sense, we think there's a positive trajectory here. There are lots of assumptions to sort of -- you have to draw it to gauge the financial scope, what this could result into in terms of how operators choose to enable SMS functionality in 5G networks. There are different routes and different parts of the tech stack that operator can use to power these services. So I think what we're seeing is that a little faster than expected and very positive early feedback, but too early to quantify in a meaningful way.

[Oscar Werner, Chief Executive Officer]

And what's happening right now, it's being pitched to the large operators in the world. That's the status, and we need to see what's happening. On the other hand, you should also -- I mean context-wise, you'd put it in the context of the operator business, right. So you just have the context of the size here. It's not affecting the main business of Sinch. It's kind of more on the operator side. But it's a very good deal for that side of the business.

[Thomas Heath]

I think we have a few questions from the conference call I wanted to bring up. First, we have [ RR ]. I think that's close to an anonymous asker, but we'll put your question through. Saying, you said you're a leader in North America. How do you see your competitive position compared to Twilio, what we understand is the leader not Sinch? Oscar, I think I'll leave that with you.

[Oscar Werner, Chief Executive Officer]

So yes, Twilio is the largest player in the CPaaS market in general. So yes, that's true. I think we are a leader, one of the leaders in North America, Europe, India and Latin America. And I'm by that not saying are we exactly the largest, but one of the absolute leaders in those markets. And yes, we're definitely at those volumes together with all the acquisitions we've made. Compared to Twilio, Twilio is, if you would compare the 2 companies, we said this many times before and we respect Twilio, we think they're a great company. Twilio is stronger than us on the developer go-to-market and marketing generated lead funnels. They're much stronger on that side. They have a much wider base of customers and a much wider base of small customers. Twilio has a lot of large customers as well. But if we do in general where they're stronger than us, so they're stronger than us on that side. Twilio also has a broader product portfolio. So they have more software services. They also acquired a email company and et cetera. So they have a broader set of software services and also into email and a set of other segments where we are not. Where we are typically stronger than Twilio is high-quality international delivery. Twilio does not own their own network. They don't own the operator connections to a lot of operators around the world. Actually, they don't own operator access even into the U.S. So on international, high-quality delivery, we typically stand up very well to Twilio, and that's why you can see, obviously, the growth -- our strong growth on the largest companies in the world because when these companies want to find the suppliers, they typically want to go to the source. And then, there we are a very strong contender. Then, I mean, obviously, Twilio is moving in this direction. They're strengthening the network, and we are moving in the other direction. So it's not black and white. But if we stylize it, that's the main difference. Yes. And I would also say, I mean, I think good competition -- I mean having good competitors is always good. I think there will be a set of leaders in this industry, a set of winners in this industry. And I do believe that Twilio will be out there, and I believe -- I do believe that Sinch will be out there. All right, Thomas.

[Thomas Heath]

All right. The last question, I think, we'll answer this jointly. The question from [ Casper Urskin ] is, what percentage of revenue is currently generated from U.S. tech companies? And how does this develop over time and what additional services can be sold into this base? And I'll start with the first part, just saying, we don't give the specifics on the size of different customer segments. But perhaps to give some color on it without the numbers, Oscar?

[Oscar Werner, Chief Executive Officer]

So could you repeat the question? I missed the last part of that question.

[Thomas Heath]

Yes. So first, it's basically, how does the U.S. tech companies, our business with U.S. tech company, how does that develop over time? And what additional services can be sold into this space of customers?

[Oscar Werner, Chief Executive Officer]

Yes. So to -- yes, it's obviously -- I mean like we're reporting over several quarters, it has been developing very well. It's one of our growth engines. And I think when you sit with those type of large companies and you're delivering a good service and you're doing that quarter-by-quarter, you get the chance to pitch for new businesses. And we have a strategy to do that, and we see that happening all the time. So -- and we obviously hope that will continue. The type of services that these companies want are similar to some others, but not all others. But they typically -- they're very data-driven. They typically want automation in any form because their volumes are so large. So they typically request APIs to do different things than to send messaging. It may be APIs to set up accounts, APIs to get the data in a specific format, APIs to understand the performance of the delivery since they actually automate the routing based on performance. So various forms of APIs to automate their own business and their own purchasing and so they understand what they buy from us is one category. They are obviously then interested in the quality. So moving from selling just this message is delivered to moving to sell in your verification space. You move to sell this phone number is verified to may -- add the kind of data-driven analysis before it, so you actually can sell on a higher level. You sell the quality and you don't sell only the message delivery is another category. Then we see an increasing interest on the new or next-generation messaging side where we do see interest from all of these businesses from some parts, but not from other parts. But that's another area which is interesting. And we see an increasing demand on the voice side from quite a set of those companies. That's probably the major areas as of today.

[Thomas Heath]

And that was a good list. I think we're a bit overtime. And I think we have some questions in the queue coming back again. So I think we'll finish up at this stage. Thank you, everyone, for participating. I hope to keep you posted in the future as well. And with that, I'll leave for some closing remarks to you, Oscar.

[Oscar Werner, Chief Executive Officer]

Thanks a lot. I'm very happy to have you listen to our quarter report this quarter. I'm happy to report strong numbers. And we are looking forward to work hard to continue to do that and continue to report strong numbers in the future. That said, I want to close this call. Thank you all for listening.

[Roshan Saldanha, Chief Financial Officer]

Thank you.

[Operator]

Thank you. That concludes your conference for today. You may all disconnect. Thank you all for participating.