Sinch AB (publ)

STO:SINCH

Earnings Call Transcript 2021-Q3

[Thomas Heath]

Thank you very much, operator, and warmly welcome, everyone, to this Q3 2021 Conference Call with Sinch announcing the or discussing the Q3 results we released this morning. With me in the room today is Oscar Werner, our CEO; Roshan Saldanha, our CFO, and [indiscernible] in the Investor Relations team with myself. With those opening introductory remarks, I'll hand the word over to Oscar.

[Oscar Werner, Chief Executive Officer]

Thank you, Thomas, and thank you all for listening into this Q3 presentation from Sinch. So without further ado, operator, if we go to Slide #2, please.So Sinch revenue past 12 months, SEK 14 billion and adjusted EBITDA of SEK 1.2 billion in the past 12 months, 2,424 people present in 49 countries. This is then excluding the, obviously, recent acquisitions, we're up to some almost close to 3,500, 3,600 people if you include all of those acquisitions.We do customer engagement through mobile technology, and we do communications in messaging, voice and video today. But as you've seen, we have significantly strengthened voice product. We are adding an e-mail product, and we added a strong business unit focusing on the SMB segment as well. So we're rapidly expanding outside this definition, and we will update it as the acquisitions close. We do 190 billion B2C engagements per year. This is close to 20 per mobile phone on the planet. And as you can see, this is going up gradually quarter-on-quarter. Again, this is on the messaging side. We serve 8 out of 10 of the largest U.S. tech companies. We're typically 1 of their top providers or the provider of telecommunication services. And this is a testament to our quality. They truly -- this is the quality-conscious buyer who really wants global high-quality delivery, that's when they choose Sinch. That is where I think we truly stand out against any other player on the planet. This market is fascinating because it's got 100% consumer penetration. We're talking about the communication between every single enterprise or everything in business in the world, every single consumer in the world over every channel that you are using, that's the size and the scope of the market. It is a extremely large and very attractive markets that we're in, and we're one of the top 2 players in this market.We've been profitable since our foundation, and we have never needed one single dollar to fund the operations of the business apart from the $10,000 share capital that the founders invested in the first round. Every single dollar that we brought into the company has been for M&A. So very high profit focus, very high cash flow focus that we had during the business from its inception.If we go to Slide 3, operator, please? Third quarter highlights. We had total revenues growth of 122% organic growth at 41% on the revenue level. Gross profit, up 86%, organic gross profit growth 20%. We're continuing investing in OpEx in product and go-to-market, and we had adjusted EBITDA up 64%.The other -- the number 2 is acquisition of Pathwire and MessengerPeople. Pathwire is one of the largest e-mail providers in the world based out of San Antonio in Texas, presently in a set of countries. They are -- also have a -- with some 100,000 paying customers, each one. They had a proven developer-centric go-to-market model. So truly addressing the developer persona with a go-to-market model, which is something Sinch has not been strong at and has not been focusing on. So we're truly adding 2 things with this acquisition. One is a very, very strong e-mail platform, and the other 1 is a very strong go-to-market model to the -- especially the e-mail developers. They have broadened this out and started to do the same for text messaging for developers who wants text methane as well. So they're clearly taking the steps to broaden this developer go-to-market.And MessengerPeople is a pioneer in customer care through messaging. They have some -- based out of Germany, in Munich in Germany, 700 businesses with customers. It's a relatively small company, run by 50 people, but innovative and one of the conversation messaging leaders in Europe, and we significantly strengthened our conversational messaging business and especially our European go-to-market and volumes in this segment. MessengerPeople closed on 1st November. We're also doing investments in scale, systems and people. And we have a fourth quarter where we projected to close 4 transactions. We have closed MessengerPeople. We are forecasting to close Inteliquent, MessageMedia and Pathwire all during this quarter. And as you can imagine, we're moving from, if you look at Q2 2020, we were 820 people round about. If you look at end of Q4 2021, we're going to be close to 4,000. This is in principle over 18 months, scaling the business 4x, 400% in terms of staff and in terms of most other financial metrics.As you can imagine, when you do this type of extreme growth over this short period of time, you have to take investments in order to just scale the business. I don't know how I could do that otherwise, right? Also, the investments that we take, we need to do it before the deals close because otherwise, we can't handle the close of them. So obviously, we -- but the investments we take now hit our EBITDA now but they're actually geared towards handling a much, much larger organization. So the proportionate share of them, when these acquisitions close, will be much, much smaller. This may be building out capabilities like ERP, CRM, HR, process innovation, systems, data platforms, et cetera, in order to just handle the scale. We only take a straight integration OpEx as integration. We're diligent about that. It's only when it's through integration will take that, but we also have a set of scale-up costs, right, just a new ERP system, HR system, et cetera. And those typically -- or we don't label as integration because they come to the EBITDA and you see parts of those investments here right now. And the context you should have is going from 820 people to some 4,000 over 18 months, that's the context.We're preparing day 1 activities. I think we're doing well on these. We're gradually improving. We have a well-structured process for that. We're also, as you know, in Inteliquent, we see the growth being lower than the Sinch growth, which we communicated since the acquisition, and we're preparing to invest part of their cash flow and profit to increase their growth to match the Sinch group growth. So that's the USD 15 million to USD 20 million investments that were taken out of the Inteliquent EBITDA, if you will, in order to increase growth. And we think that's highly possible, and it's very, very concrete.Operator, slide 4, please. We see continued broad-based growth. It's something we worked on for a long, long time, and we communicated it many quarters ago, and we also communicated we see that's now a broader base growth outside the biggest customers that we have, the big techs from the U.S. And we see that continuing this quarter, which I'm very happy with. So on the gross profit level, 86% Q3 to Q3, organic gross profit, 20%. And the majority of this is coming now from the broader base while the bigger tech customers in this quarter having a lower growth than average because we have some volume discounts with them. I think it's very natural as well when customers grow very, very large, well, they come to negotiate price. And this is one of the quarters where we did negotiate the price fairly because their volumes are very, very large. But that said, in this quarter, they don't contribute so much the organic growth, but they contribute -- and that's mainly driven by the broader based growth. As you can see that, you can see higher growth in transaction volumes and revenues, up at 41%. There are 3 things that are affecting the gross margin. First, it is a carrier pass-through fees. So basically, operators have increased prices. What happens is they increase in 1 quarter and then we increase our prices in the coming quarters. It is also the renegotiating volume discounts with some of our largest customers, which has an impact when it happens and then it tails off in the quarters after. And then you have some mix effect as well, depending in what countries do we send and what margin do you have into these specific countries? That's the 3 main reasons to the gross margin effect. And that's the reason to the difference in revenue and gross profit growth.Operator, slide 5, please. We're adding to volumes in messagings. We see -- we do 46 billion transactions in Q3. It's a 229% increase year-over-year, a 97% higher revenues with 35% organic growth and 67% higher gross profit with 19% organic growth; continued broad-based growth in customer types. And you should know that SDI customer base is still growing slower than Sinch, which will affect the combined growth in Q4 when it's first quarter that they are actually reported as non-M&A. We are, however, seeing positive effect. We work hard with that customer base and the sales team, and we're seeing positive effects in turning that growth as we had projected from start, but it's taking a little bit longer than the -- to get to -- up to the full Sinch growth level than the 12 months, but we see no structural reason to why this base would grow slower than the Sinch base when we're applying all the same models as we're doing on the Sinch side.Operator, slide 6, please. We are extending our Conversation API with Apple Messages for Business, with Telegram and KakaoTalk and making this a even broader, covering a lot of more channels, basically. And you can see the number of channels we're covering. For enterprise, this is very, very powerful. The communications landscape gets more and more complex with more and more messaging apps, and handling all of those and understanding how to handle them in various jurisdictions and various processes is pretty tough, and that's why we combine them with our Conversation API, Again, there's no reason why we couldn't add the e-mail services or other services to this as well going forward basically.All right. Operator, next slide, please. We have healthy growth in the Voice and Video segment. As you saw, this had a very strong growth before COVID and then took a hit during COVID. it's very logical because one of our -- a of couple largest customers are the ride-hailing customers in the segment. And obviously, during COVID and lockdown, that's a slower growth. So it's been a little bit lumpy over the last quarters here. And we're now seeing them coming back to a healthy growth projection with 23% revenue growth, organic at 26% and 44% gross profit growth with organic at 44%. Previously, we communicated that we had a temporary traffic at low gross margin that has now ended. So gross margin is going up from 18% to 28% as per previous communications in Q3. We're also preparing for the Inteliquent closing. This is Sinch Voice business, and this is then combined with Inteliquent offering. It's a good combination where we're getting strong both in the higher levels of programmable voice, more software and the lower level voice network. We see very strong growth opportunities for this business going forward, but we're investing in growth initiatives, both on the product and the sales side.Just a couple of examples. Inteliquent according into them. They have the best voice network in the U.S. broadest reach in the U.S., but the highest volume providers in the U.S. But they only are spending, I think it's around about 10% of their OpEx in sales and marketing. And relative to what we have seen or what any other CPaaS player have, a very low investment in sales and marketing. And we just say, hey, this fantastic network, if we invest more in sales and marketing, we will get more out of it. So it's things we have done before, things we've proven before, applying the same models, but selling more of a very, very good asset that we have.Right. Operator, Slide 8, please. We have this quarter strong performance on the operator segments, and this is the Sinch operator segments. Growth since Q4 '20, driven primarily by the SDI acquisition, which had an operator business in them and healthy growth and profitability in both Sinch and SDI businesses in Q3. We do expect continued earnings volatility between quarters in this segment. And then we have -- Inteliquent is round about half of the growth profit is geared toward operators. So that, that will be added to the operator segment going forward, and that's a significant piece, which is going to be the largest piece of by operator offering going forward. Very stable, very high profit on the Inteliquent side, but lower growth than the general CpaaS.All right. Operator, go Slide #9, please. These are the acquisitions. I must say we're extremely happy about all the acquisitions we made lately. I think we have truly moved Sinch to be one of the top 2 players in this business on all accounts. You can count revenue, profit, adjusted EBITDA, message volume, call volumes, mail volumes. On any metric you would count, we will rank as one of the top 2 players in this very attractive market. I think we've gone from being a messaging provider and then adding Inteliquent being the largest voice provider in the U.S. adding message media being the largest provider to SMB segments in the world, adding 65,000 customers and a strong online go-to-market model to SMBs. Adding Pathwire, adding a strong e-mail product and a strong developer go-to-market and thereby covering the 3 biggest channels that I think we all use as communication between ourselves and enterprises, we all use messaging channels like text or WhatsApp or ABC, we all use sometimes voice, and we all use e-mail. And none of those channels are going to go away. And being one of the very, very few companies on the planet that can offer all of these 3 services at scale on a global level is a very powerful position to be.MessengerPeople, a smaller transaction, really moving us forward in the conversation messaging space.So we're -- looking back, I'm super, super happy and all our teams are very happy. And the excitement in the sales teams about the ability to cross-sell these different services is very, very high.Looking at slide 10. The pro forma here illustrates the greater scale. You can see the very, very significant moves we're making. We're very decisive about being a leader in this industry. There is nothing that will stop us from that, and we're really going for that. We think the market is very attractive in CPaaS, and we have our eye set on being 1 of top 2 providers, and that's what we are with these acquisitions. You can see going from the strong organic growth that we have and then adding Inteliquent message medium Pathwire on the gross profit and adjusted EBITDA side, you can see the monumental shift that we're doing. And this is also why we needed to and think it's prudent to take the scale up investments in order to handle all of the these acquisitions. Here, you can also see the power of our growth model. We have strong organic growth. We have been ranging between 25% and 35% over the last quarters. This quarter is 20%. There is no reason we don't see any structural change. It's just 1 quarter becomes super good like last quarter and this quarter a little bit lower, but there's no structural change in that. But we see the very, very strong organic growth that we have had over the last many, many quarters over the last 5 years. And then we're adding the very strong M&A growth engine that we have. And combining these 2, we have had, on average, the last years -- the last 5 years, round about 50% growth year-on-year. Roughly half of that, 25% being organic and roughly half of that being M&A driven. And I think that growth model is just very strong. We count on gross profit, and it's a very simple reason for that. You cannot compare these business units or these businesses on a revenue basis because Pathwire has like 80%, 85%, 90% gross margin, while a messaging business has 20%, 25%, and comparing those on revenue, you will get overweight on the messaging side and underprioritize the Pathwire side if compared to revenue, right? So we need to compare it on a like-for-like basis. And the like-for-like basis is the value you create and the value you create is basically the gross profit. It's as simple as that. And I think it's -- it risks very much screwing any comparison if you compare to anything else.So the pro forma last 12-month revenue is SEK 21.3 billion. So you can see the scale up we're doing here. I think it's reported 14 around about -- or 12, sorry, and Roshan was giving me a look there, sorry. But pro forma is SEK 21 billion. The gross profit of SEK 7.3 billion an adjusted EBITDA of SEK 3.2 billion. So you can really see the growth in the business that we're driving here.All right. operator, slide 11, please. We're also adding structurally here. This is not only adding companies on top each other. It is very carefully selected and it's driving structural competence to the business. You can see Sinch has been strong on the enterprise go-to-market where MessageMedia and Pathwire were actually pretty not so strong. Pathwire being very strong on the developer go-to-market, signing up thousands of developers each month, having 100,000 customers. They're really adding that go-to-market motion, and we will let them run the developer go-to-market for all our products. Because, frankly, they're just so much better than Sinch is on that. And then the SMB market is basically MessageMedia. SMBs are business users, think of a hair dresser around the corner who goes in online, signs up with a web page, but it's not a developer. It's a business user who use an online graphical user interface basically. Got 65,000 customers. So that's also an online go-to-market model, which MessageMedia is the leading player in the world.So really adding true competence as well on the go-to-market model on both of these acquisitions, which we're very happy about, And adding true online rapid customer acquisition go-to-market in 2 very important segments.Right. operator, slide #12. MessengerPeople. We're leading -- extending our strong position in the conversational messaging space, with MessengerPeople being one of the leaders in Europe. They're selling an integrated applications to midsized businesses, primarily focusing on the VP of Customer Care, which is a customer or persona segment that we have not focused on so much, and basically operating the customer care for medium-sized businesses in a more efficient way via WhatsApp, RCS, Viber, KakaoTalk, et cetera, in a very integrate way. It's like an online self-sign up, you can sign up online, if you will, you can test the product and see what it is. It's a really good and interesting experience, which is growing significantly.All right. Integrations, TWW and Wavy. We closed TWW October '20, Wavy in February '20. We're migrating customers and supplier to our shared global platinum as we speak. On the supplier side, we've gone pretty far. And on the customer side, we're almost midway. And that's happening as we speak, and we're going through these projects, and we have engineers and operations people and product managers on these projects right now. And the goal is at the end to shut down the platforms and reap the operational synergies for that. We're also having initiative to scale Wavy's conversion messaging business, which is very large and leading in Latin America, in other regions with good results. ACL, we closed it in September '20. We are starting to -- we have terminating the international traffic to India, leveraging the ACL direct connections, we have waited strategically to integrate the platforms because we think that can be done later, and there are so many specific things in India. So we have prioritized the TWW and Wavy over that. So we waited for that in order to not do too much once. But we're then selling Chatlayer conversation API, offered via WhatsApp in India to Indian customers via the Indian -- via the ACL sales teams with good results. So we're really seeing the cross sales there, and even though we're prioritizing the platform integration of TWW and Wavy for the ACL platform.SAP closed the deal in November. Sales teams are already merged. You cannot see the difference across 19 countries, and we mix the leaders, picked the mix. So our [ sale ] leader is from SDI. A lot of the account management leader in the U.S. are from SDI at that point, you have this mix all across, so it's fully integrated. We're migrating customers and suppliers on to our shared global platform with the aim of shutting the platform down as well. And the P2P messaging products for operators are aligned with Sinch operated software offering and moved into that route from an operating control perspective.Scale-up, a rapid increase, as you can see, going from 820 people to 3,800, 4,000 over 18 months, requires a scale-up in core functions, and that's what we're doing. It's all across various different areas. Operationally, it is relatively undramatic. We need to do it before the closing. And obviously then we take a little bit too much cost now compared to our EBITDA right now. But that will -- obviously, when we get the new EBITDA, it'd much lower in proportion to the EBITDA that we have then. And then we're also taking a little bit more cost now, which we don't need to take later as we intend to kind of slow in the growth of the OpEx investments in this area going forward because we've already taken the cost to scale to that level. So long term, we're just seeing we're going to grow OpEx in line with GP. But obviously, in this type of situations, you need to be -- to take it a little bit upfront in order to handle a very, very rapid scale up.Then we're planning a set of integrations. We're having a set integration team with the leader coming in from Thomson Reuters. She used to handle Thomson Reuters did 40 acquisitions a year when she was there. So this is an experienced person who really drives this, really loves every integration comes in. And wants there to be more, which is a very positive thing. We're now doing integration planning with Inteliquent signed in February, expected to close in H2, regulatory approval processing ongoing. And now we're doing now doing integration planning with the teams in regular cadence meeting. We're not allowed and we're not doing integration execution before closing.Focusing a lot on cross-sales of voice and messagings through Sinch and Inteliquent customers. And in principle, 100% of Sinch customers want voice and 100% Inteliquent customers want messaging. So I think that's a very good opportunity.MessageMedia signed in June, expected to close in H2 '21. We're happy to say that we just received the regulatory approvals for MessageMedia, like we have asked before and we projected in Q4. So now we just to see them. And we're then obviously preparing for close. We're shifting their back end to Sinch connectivity and then assessing joint growth opportunities. They want a set of our products like Chatlayer conversation to, et cetera, integrating into that. MessengerPeople signed in September, closed in 1st November. And we're assessing integration options while also driving -- how can we drive their growth into other regions faster? Pathwire signed September '21, expected to close H2 '21, regulatory process is ongoing, and we're also doing integration process projects here, getting the know the team, what are we going to do, who sells what, and identifying cross-sell opportunities. And here, there's also very large process opportunities. I would say like 100% of the Sinch base, customers base is using e-mail. There's not a business in the -- on the planet that is not using e-mail on some -- in some form of communication or maybe there are a few but very few. So in principle, 100% of our customer base, have an e-mail service, and we obviously intend to cross-sell. The 100% of Inteliquent customer base have an e-mail service and we intend to cross-sell. And Pathwire is already selling text messages to their base, and they will add the voice messaging, voice offering as well. So very interesting and exciting cross-sell opportunities. Our sales teams are very, very excited. When we talk about the opportunities to them, they're almost drooling over the opportunities, and they're really saying, "Hey, this is -- I can sell that and I can sell this." And right now, we're putting the structures in place in order to handle all of those cross-sell opportunities that we can.Revenue-wise or GP is, it's going to take a little while, a couple of quarters because we've got to close in Q4. We got to address the customers in Q1, Q2. And then the customers are going to -- they're going to sign the customers and then you need to port the traffic, right? And it takes a quarter or 2 to port traffic. So that's how it is, but we already have very strong signals from the cross-sell opportunities.All right. Roshan, financials.

[Roshan Saldanha, Chief Financial Officer]

Thank you, Oscar. Yes, looking forward to close all of these transactions here in Q4, as communicated earlier. I'm happy to comment -- present and comment on the financials for Sinch in this quarter. We start with Page 16, which shows the gross profit bridge. As you know, a significant part of our revenues are paid as cost of goods sold to mobile operators. We pay them to send messages and place calls, but the rates they charge can vary differently between markets, and therefore, we focus on gross profit as a key measure. Here you see again high growth rates in Q3 and Q4 2020 implied tough comparables for us but we still have the organic growth rate of 20% for this quarter, which we are happy with. And then acquisitions on top of that contributing 70%. And then we have FX effects reducing the growth by 4% to give you the total growth rate of about 86%. If you break this down into the segments, we have messaging growing at about 19% organically. We have voice and video growing at 40% organically. And then you have the operator segment. And since we are only talking about the organic piece, it's the Sinch-operated software business that's growing 16% organically. Inorganic growth contributions from SDI, SEK 247 million, Wavy, SEK 58 million and ACL, SEK 32 million. Note that the ACL inorganic growth contribution is for the 2 months that they were not included in the base for 2020 since we closed that transaction in September of 2020.Moving on to page 17 on the income statement. Adjusted gross profit coming in at SEK 896 million for the quarter compared to SEK 481 million last quarter. EBITDA coming in at SEK 157 million for the quarter versus SEK 215 million last quarter. Now EBITDA is including acquisition costs, integration costs, costs for share-based incentive plans as well as operational exchange gains rate and losses. Excluding these items, we report adjusted EBITDA of SEK 298 million versus SEK 234 million for the same quarter last year, which implies a growth of 27%.On EBIT, we reported an EBIT of SEK 25 million versus SEK 155 million EBIT last year. Again, EBIT includes, in addition to the extraordinary items affecting EBITDA, also includes depreciation and amortization of acquisition-related intangible assets. Excluding those, adjusted EBIT was at SEK 270 million for the quarter versus SEK 219 million for the same quarter previous year. And then net financials are affected by currency transactions and currency hedging ahead of upcoming acquisitions where payment is due in U.S. dollar and in Australian dollar.Moving on to the next page, where we try to reconcile cash flow with adjusted EBITDA. Here you see that adjusted EBITDA is then reduced by paid interest, paid taxes and other items. Other items are primarily consisting of foreign exchange-related transactions due to the large cash balances that we have in U.S. dollar. And cash flow before changes in working capital amounted to SEK 244 million for the quarter versus SEK 145 million for the same quarter last year. Again, super happy with the strong cash flow generation in the underlying business at 82% for the quarter and 69% on a rolling 12-month basis.Moving on to the next page, Page 19. You'll see the full cash flow statement. Again, the cash flow before changes in working capital coming in from the previous page at SEK 244 million, which is then reduced by a change in working capital of SEK 735 million. We have, of course, seasonal swings affecting working capital from quarter-to-quarter. In addition to that, as we have commented previously, the SDI business which has come into the group has had a negative working capital development due to all balances related to pre-closing, which we are working through, but we still have some way to get through that. And for the quarter, we also have effects from a few operator-related contracts while we are prepaying operator charges in order to get both exclusivity as well as preferential terms into this contract -- into these operating networks.Now this is something we have done quite often previously, and we have products that are quite unique in the market to give us these advantages with operators. But again, we don't see this as a frequently recurring kind of transaction and especially at this scale.Right. On Page 20 then, you see a summary of the cash flow reclassifications that we have done this quarter. We saw that in Q1 and Q2 in our cash flow reporting, we had part of the financing for Wavy as well as the significant currency effects being recognized under operating activities and investing activities. We have now reclassified the financing for Wavy as a new share issue and also move the significant currency effects down to the bottom part of the cash flow. We believe reclassification this now represents a better -- gives a better understanding of the underlying development of our cash flows. And you can see here sort of the numbers for all the 3 quarters, hopefully helping you in your analysis.Moving on to Page 21. You see the financial targets. Our financial targets are unchanged. We want to grow adjusted EBITDA per share with 20% per year, and we want to keep net debt over adjusted EBITDA at under 3.5x over time. Adjusted EBITDA per share grew 19% in Q3 2021 measured on a rolling 12-month basis. On a quarter-on-quarter basis, adjusted EBITDA per share reduced related to the fact that we have completed share issues for the financing of acquisitions of Inteliquent, Pathwire and MessageMedia, whereas that adjusted EBITDA is not included in our reported figures. And that trend will then change as we go into Q4, and we consolidate Inteliquent, Pathwire and MessageMedia, of course, those numbers will be included in our adjusted EBITDA for Q4.On net debt, we have a reported net debt, which is negative, which implies a cash position of 8.9x measured on a rolling 12-month basis. Moving on to the next page, on page 22, you see how that would translate on a pro forma basis if you -- if we completed all of the announced acquisitions, and essentially ending up at 2.8x adjusted EBITDA, which would give us a net debt of -- on the pro forma basis of SEK 8.5 billion. The updated financial target, which was announced earlier. So it's not updated as at this report but updated earlier is to maintain net debt to adjusted EBITDA under 3.5x, and that is what we continue to report here even on a pro forma basis.And then finally, moving on to the last page, Page 23, where you see the key financials and the key KPIs for the consolidated group. Post closing of the announced acquisitions of Inteliquent, MessageMedia and Pathwire, where we see that gross margin on a last 12-month reported basis, with the announced acquisitions would be 34% instead of the reported 24% and adjusted EBITDA margin would be on a combined basis, 15% instead of the reported 9%. In the table on the -- or graph on the right, we also represent then how our gross profit mix would change where on a reported basis today, we have 83% of our gross profit coming from messaging, a small part from voice and video, and then 12% from the operator segment.If we had included the announced acquisitions, we would have 52% of our gross profit coming from messaging, 15% from voice and video, 12% from e-mail and then 19% from operators. So a much more diversified gross profit mix as a result of the announced acquisitions. That being said, I'd like to hand over to Oscar for final closing comments.

[Oscar Werner, Chief Executive Officer]

Thank you, Roshan. So from our perspective, we do believe that we see a very strong position created by our continued organic growth, plus these acquisitions. We feel that all of these have turned out very well. We're super happy, and we think we are getting a very strong position in a very attractive market. Number two, we do see -- I mean, on the gross profit growth, it's been a big discussion, of course, today. We see no underlying change or structural change in the business. We see that quarters sometimes come in a little bit higher like last quarter, sometimes come in a little bit lower like this quarter. It has its reasons like we have explained with the operators raising prices in a specific quarter or big customers renegotiating volume banding in specific order on some mix. But there's no underlying structural change in our trajectory as we see it. It's obviously hard to always plan exactly what happens in a specific quarter, basically. But we feel confident of our market position. We're very confident of our market position and very confident about the market and our growth -- are continuing our growth agenda with a strong organic growth. That's truly how we see it operationally, right? And we are very happy to see the very strong market that we're in. It's a market that's really turning where enterprises are increasingly wanting to talk to us, not only about their messaging needs, not only about their e-mail needs, but they want to talk about -- talk to us about how we engage with customers, how to reduce their churn, how to reduce the customer care costs. So we're getting 1 layer up and a much more strategic discussions with a lot of the enterprises. And that's I think it's a very, very interesting trend going forward of us supplying, becoming a more strategic partner. We're also supplying a lot more software and SaaS services on top of the of the high-volume transaction volumes. That said, thanks a lot for your interest, and I'll leave it back to Thomas.

[Thomas Heath]

Thank you very much, Oscar. Thank you, Roshan. And operator, may we have the first question, please?

[Operator]

[Operator Instructions]Your first question comes from the line of Predrag Savinovic of Carnegie.

[Predrag Savinovic, Research Analyst]

Questions. This is on the pricing dynamics. So from a competitive standpoint, you mentioned in the report, it's a fair market. But we're happy to hear more comments on that. But we know this is a scale game, of course, we know Sinch has the higher scale when it comes to messages terminated. We know their U.S. peers that started a high gross margin, feels unlikely that they want to combat you on core customers with lower prices when there's lower -- or certain European players which are quite insignificant compared to in size. So wondering on the pricing side, are you proactive towards your key accounts? Or what is it about? Or is there something happening new on the price side. So really reasoning on why you offer this to your key accounts?

[Oscar Werner, Chief Executive Officer]

I think it's a very natural thing. When accounts grow as much as they do and when you are the biggest brand in the world, you offer sometimes say, hey, I have tripled my volumes over the last 3 years or I have doubled my volumes, and then you start to go, can I get a better price? And I think that's prudent to do so. It's not so that the gross profit is shrinking. It's -- but when you buy at scale at this volume, then I think it's a very natural thing. Of course, we also see -- I mean, these accounts, it's the biggest brands in the world, not like -- It's not like any of the competitors don't know about them. So at all times, our competitors are always trying to get into them. That's all how it is. And then we try to be proactive, but not afraid, but also knowing our quality and valuing our quality. But we also, at some point, be very proactive. We can't only react. So we're also proactive and taking the steps that we think is to get to a reasonable and balanced price model -- price level.

[Predrag Savinovic, Research Analyst]

And 1 on operator costs and the prebuying of traffic and the working capital impact. In you doing this, in prebuying, does that imply that you expect more hikes going forward? Or what do you think on the carrier side for the coming quarters?

[Roshan Saldanha, Chief Financial Officer]

I mean -- Roshan here, Predrag. And I think, firstly, what we have to say is I mean we have a wide operator network. We -- I think at last count, we had more than 450 operators that we are directly connected with. Now we're talking about a few selected ones where we have the opportunity, through various technical and financial solutions, get better terms. And then we use our size and our position to actually obtain that. This is by far not yet a widespread phenomenon. And I think it's difficult to draw from these individual deals any kind of broad trends on operator price changes across all of our connectivity kind of portfolio.

[Predrag Savinovic, Research Analyst]

And just 1 finally, your reasoning long term...

[Thomas Heath]

We will keep you -- you will have to go back to the end of the queue. We have a lot of participants, sorry Predrag.

[Operator]

[Operator Instructions]Your next question comes from the line of Daniel Thorsson of ABG.

[Daniel Thorsson, Research Analyst]

I have a question regarding SDI. It seems like they have been growing sales slightly over the 1.5 years since you acquired it, while declined around 8% on gross profit. Can we get a feeling for the current organic gross profit run rate in SDI as it will have a dilutive effect on organic growth in the coming quarters?

[Roshan Saldanha, Chief Financial Officer]

Yes. I think just my very brief comment. I mean in a way, continuing what I've said -- what we said previously. If you look at the SDI business we report -- we've reported that in 3 segments. We have the A2P messaging reported as part of the messaging segment. We have the operator interconnect P2P business reported as part of the operator segment. And then we have the contact center business reported in the other segment. From a current trends perspective, what you can see in Q3 and is a little bit of that in Q2 is that we have a good development on the operator interconnect side. I mean that business is developing to our satisfaction. And I think we're still trying to see if that is a long-term trend. And we're obviously working to make that a long-term trend. On the A2P messaging side, we said that business growth around 10%. If -- when we announced the transaction, what happened between signing and closing is that the growth actually declined in the A2P messaging side. And that without speculating, they have to do with the lack of attention in doing that period from the SAP group on this business, et cetera. And what our focus has been is to get that trend up. And really, we -- what we can see in terms of the underlying customer communications and discussions that we are having with the customers is that there is no reason for us to believe that it should not grow at the same rate as our organic growth. But it's going to take us a bit of time to get there. Right now, I would say that it is still weak compared to what we said at the time of signing. And I think that's sort of where it is currently. Oscar?

[Oscar Werner, Chief Executive Officer]

Yes. I think it's weak, but improving, right? We see good trends. We're doing the things we are doing, and we see that traction taking effect. And the things are very concrete. It's like okay, SDI didn't have any new sales people. If you don't have any new sales people on your base, you're not going to grow as much, right? And they didn't work as much on the account management side, didn't have any significant marketing stance. It's a very concrete thing to improve in our areas. We implement them, we see the effect, but it's not a full scale yet. So...

[Operator]

Your next question comes from the line of Fredrik Stenkil of Nordea.

[Fredrik Stenkil, Research Analyst]

So back to the question about sort of carrier fees and price pressure. Just if we think about the organic sales growth for messaging was 35% and gross profit was 19%, that discrepancy there, is that -- could you comment anything about the split between the higher carrier fees and how much is sort of GP value capture that goes from you to the customer, if you understand my question?

[Thomas Heath]

Yes, Thomas here. I think, I think you're trying to break down the discrepancy between the growth rate of organic revenue and organic gross profit, where we've said the larger part is carrier pass-through fees, which will annualize after 4 quarters, and sort of drive up revenue growth during that time without really affecting gross profit. Then you have a knock-on effect that you might not be able at every single point in time to prop that cost on to every customer immediately, at which point you will actually see a detriment to gross profit, right? Even if the largest part is more a dilution of margin than impacting gross profit.Then the second big aspect, of course, as you alluded to, is where we renegotiate our volume bands over pricing for incremental traffic on larger customers. The carrier pass-through fee is the largest part, but the other one is a key factor, too. And that, of course, brings some optimism as you annualize that in the beginning of 2022.

[Operator]

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

[Stefan Gauffin, Analyst]

Could I first just follow up on the previous questions? The volume discounts, I mean, that is, I guess, a regular part of the business. But is that sort of something that you do on an annual basis with these customers? Or do they happen once in a while? I mean, will you benefit from the larger volumes you're seeing now driven by these volume discounts for a period? And then just a question on the cash flow impact from the prepaid mobile operated traffic tariffs. Is this expected to bounce back as you use volumes on these contracts? And are you actually taking any risk relating to volumes?

[Thomas Heath]

Right. If we start off with the price negotiation, there is not a particular cycle. But when you work with some of the world's largest companies, you have a continuous dialogue and reassess. So there is no particular timeline. I think why you're seeing this perhaps a bit more pronounced in Q3 and Q4, is to recognize where we were 12 months ago, where we were quite open that the majority of our growth in absolute terms were generated by a subset of our customers, our very largest customers, right? We also said in the beginning of this year, and we said throughout this year that we're increasing seeing a broader base growth. Now when you look at the comparables and you look at the impact year-on-year, recognizing that a large part, and outside part of the growth contribution came from these customers 1 year back. And it's exactly those customers where we have started some new pricing. That's why you get a little bit of a pronounced effect in Q3 and Q4. Of course, as we broaden our growth, that type of concentration decreases, right, and we already see that. So it's a little bit special with this 1 or 2 quarters based on the concentration we had 1 year back. But both on the organic side, that's changing and even more so with the acquired agenda, of course, there's a greater breadth of the business. Then on the other question, Roshan, on...

[Roshan Saldanha, Chief Financial Officer]

Yes, I mean, I can try to answer that. I mean obviously, when we do these transactions, we are -- we have a number of risks, obviously, that we try to mitigate and manage. We have obviously clauses in the contract that could protect us, for example, in certain types of force majeure situations or in a tech shift situation, et cetera. We also -- I think in the case of these contracts very often, and I think in at least talking about the transactions for this quarter in all of these cases, actually put in software solutions in terms of a firewall at the operator that make sure that we can secure that all of the traffic is ending up with us and that there are no ways around it. But at the end of the day, yes, I mean, there is a certain volume commitment that we make. And here, we rely on our long expertise. Many of these are repeating customers with us also. So we have a good insight into the history of the traffic. But there is an underlying sort of volume risk that is inherent in these kind of contactors.

[Oscar Werner, Chief Executive Officer]

Yes. There is -- but he also so that we think, obviously, making this transaction, we think the risk is very manageable. And they just this is made by the -- our longest standing experts, being 20, 25-year messaging veterans having seen this many, many, many of times. So we think the risk is very manageable. But yes, there are risks in certain types of deals, and this is one of them, and what we think is very manageable.

[Stefan Gauffin, Analyst]

And then relating to the cash flow impact, should we see this coming back at the use the volumes?

[Roshan Saldanha, Chief Financial Officer]

Yes. I mean I missed to answer on that. I mean that can vary a little bit depending on the clauses in the specific contracts. It does come back over the lifetime of the contract, whether it comes down evenly over the lifetime of the contract, sometimes in towards more tilted towards beginning and sometimes more tilted towards the end. That is really an individual contract decision. But yes, it comes back over the lifetime of the contract.

[Operator]

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

[Daniel Djurberg, Research Analyst]

Yes, 2 questions. You might have touched upon this. But again, on the volume discounts. Is this only part of the big U.S. tech companies or only a few of them? And also, is it impacting the full quarter? Is it just part of the quarter? Will it be similar Q4 or we see increasing before being more evening it out, so to say? And if also you could comment on how large part of the messaging revenue that came from this U.S. big tech in Q3 versus 1 year back?

[Thomas Heath]

Thank you, Daniel. We've got a very poor line, but I believe you asked about how many of our larger customers were renegotiating prices, Oscar?

[Oscar Werner, Chief Executive Officer]

So as long as the first part. Subset of the large customers, this is not a regular event. This is -- we have a regular weekly, daily meetings with these customers. It's very, very large customers and very large buyers. No, it's not all our major subsets, but it's -- and it's not regular. It's very large deals. The second -- and the coming 2 questions you had was for?

[Daniel Djurberg, Research Analyst]

Part of the messaging revenue that came out from the U.S. big tech in the quarter?

[Thomas Heath]

We haven't disclosed that figure.

[Daniel Djurberg, Research Analyst]

Okay. May I ask you about Sweden. It was not your focus market but still it was quite a lot down year-over-year, especially in messaging. Any structural impact or more market share or anything else that we should be aware of?

[Roshan Saldanha, Chief Financial Officer]

Daniel, I can take that one. We have customers that have invoicing addresses in different countries. And we essentially base that information on the customer's invoicing address and really what has happened in that specific case is that we have large customers that have moved invoicing addresses, which means that revenue has moved between sort of jurisdictions in that reporting. And that can happen from time to time in that reporting.

[Operator]

Your next question comes from the line of [ Andres Jolson ] of Danske Bank.

[Unknown Analyst]

Just curious about the sort of scale capturing investments. For how long will they last? And then secondly, what about M&A ahead? How do you see that in terms of size and perhaps timing also with regards to the integration work that you do now?

[Roshan Saldanha, Chief Financial Officer]

I can maybe start just with a brief comment on the first question, and then I'll hand over to Oscar to elaborate further and answer the M&A question. I think what we have said previously is that we see that the ramp-up that we've seen in previous quarters of the cost will decelerate, and I think that we're happy to see in the Q3 numbers. that's the case. And I think when you look at these scale investments, I mean, some of the investments that we're making is just needed by the fast growth of the business, right? We've gone from 800 people to more than 3,500 people, and the ERP that we chose to operate the business on when we were 800 may not be the ERP that we choose to operate the business on when we have 4,000 people. So I think we have to look at these decisions in the context of where we are at every point in time. But with that being said, Oscar?

[Oscar Werner, Chief Executive Officer]

Yes. So yes, we're taking them now and then scaling them off as we have -- as we bring in these companies, right? And we do think we take a little bit too much cost now, to be honest. But we just have to handle the extreme growth. And we see that, okay, we're not efficient in all functions. We need to overstaff a little bit. We need to bring in consultants, et cetera, because it does go so fast. And there are plenty of opportunities to optimize that going forward. But we just need to handle the growth. And right now, it's more important to close these transactions than to optimize growth in these 2 quarters. So that's very clear. And long term, again, we plan to grow OpEx in line with GP. There's no questions here.On your second question, how do we see the opportunities for further M&A? Q4 is obviously a very busy quarter, I would say. We may not do close 4 large or 3 large and 1 small transactions every quarter, but we will not. But we do see -- and obviously, we need to time all M&A to our ability to integrate and able to handle it very, very clearly, and we're very cautious and conscious about that. But a little bit more long term, we do see a continued consolidation. We do see a very attractive pipe of incoming M&A opportunities going forward. And there is no change in our M&A strategy going forward. We will for the coming quarters and years, we project to continue to grow organically and by M&A during this very intense consolidation phase of this market. And I think that's very beneficial to -- as a company, our customers and our shareholders going forward as well.

[Thomas Heath]

Operator, do we have a final question?

[Operator]

Yes, sir. It's from the line of Ramil Koria of SEB.

[Ramil Koria, Analyst]

Just a bunch of follow-ups, I guess. But looking at the gross margin, I guess everything you're seeing, everything you're saying points to Q3 being the trough. Is there -- and I guess sort of U.S. messaging revenues, Q3 was actually lower than Q2, which is the first time we see a sequential decrease since 2019. You're saying that you're seeing a broad-based growth, et cetera, et cetera. And then if you remove these acquisitions coming in with structurally higher gross margins. Is there anything that sort of points to Q4 being in line with Q3 or even worse off gross margin-wise?

[Roshan Saldanha, Chief Financial Officer]

I can try to start off there. I think as we said, Ramil, on the gross margin front, we have a number of different effects. If you look at the mix effect obviously plays in, and that's a bit difficult for us to specifically kind of give any commentary around. That can vary a lot from quarter-to-quarter. On the operator price increases, what we essentially see is that you have, where we have bundled customer offerings, including the operator price and our gross profit. It does take a bit of time for us to analyze that customer by customer and work with customer pricing to increase margins. So that is something that is not just a 1-quarter effect, but it can take a couple of quarters to 3 quarters to kind of work that back up again. And again, on the volume discounts, what we've said, I mean, that's at least a 4-quarter effect, right, in terms of when it starts to play back. Now that being said, Q4 is also a seasonally strong quarter, has been historically. I think it will be interesting to see with all the news flows around sort of component shortfalls and delivery challenges around the world, how we see our volumes play out during Q4 here. But I mean, there is definitely a seasonal effect during Q4, which will play positively for us.

[Ramil Koria, Analyst]

And just a clarification there, sorry, Oscar. I mean, these price hikes from operators, that was 2 quarters ago, if I'm not completely mistaken, or at least in Q2. Have you started to push them out towards customers?

[Oscar Werner, Chief Executive Officer]

Yes, we have, but there have been continued price increases over multiple. It start with 1 and then the other operators going to follow. So it's been continued in the market, right? The one operator does it and the others feel they can do it as well. So it's continued. And it may not stay longer than we expected, but continued longer than the first time we reported it and then we reported again, right? And then we have started now doing price increases on the first ones, but then obviously not on the others, but actively working on that.

[Thomas Heath]

This is not a new phenomenon as such. It's just that occasionally, it gets a little bit lumpy. So we don't want to exaggerate any trends. This is relatively business as usual from our point.

[Oscar Werner, Chief Executive Officer]

Yes. And I think we have like 700 price changes from operators in the first part of the year or something. So this happens all the time. it's a part of our business, it has happened every year. But sometimes it's hit individual quarters, right? But again, this is not nothing new. It's hitting individual quarters. But to get back to your question, it's -- there's no change in the underlying structural growth of this industry. We see no reason and no intent. We continue to drive for the same growth levels that we have seen historically. And then trying to grow. So there's no underlying change in that trend, but things hit individual quarters a little bit differently. That's kind of, I think, the underlying bottom line. We do see 2 trends in the market. And on the positive side, increased customer demand for a lot of new things and extremely active market. And then we also saw increased competition. And I think these 2 are evening out a little bit. It's a tough market, but it's a very, very high growth and very, very attractive market on the other hand. So no underlying change in underlying projections or -- from our perspective or what we believe in Q4 growth rate.

[Thomas Heath]

If you just round that off on -- since your question was really quite near-term focused. You've got to separate out the near-term effect happening with comparables in Q3 and even tougher in Q4, the impact of SDI coming in, the price changes that we pushed through to some larger customers, which were in the beginning of 2022 and will have an effect also on Q4. All of these things have an intermittent impact on the second half of this year. Whereas when you take a slightly longer view, recognize they were closing 4 important transactions during Q4, which will transform our P&L. And we will have multiple mix effects, including higher gross margin, higher adjusted EBITDA. Starting already from Q4, we will begin to see those mix effects. And as we go into next year, and again, reiterating what Oscar said, we're starting to see the multiyear initiatives in broader growth payoff, right? We're not getting that pay off in Q3 and Q4. but a little bit of a rough patch in this type of quarter, it doesn't change our fundamental view of the market we operate in.

[Ramil Koria, Analyst]

That's clear. A final one, if I may, just on the A2P monetization deal here. I mean last presentation, I think you spoke about the turnkey customer engagement market growing by above whether 25%. These type of deals, should they incrementally add to your sort of ability to take market shares? Or is this sort of you being defensive for a lack of a better word?

[Oscar Werner, Chief Executive Officer]

No, this is a growth driver. I mean, very clear. I mean we don't -- we wouldn't make these type of deals if we don't see a very good business opportunity, right? You don't spend this amount -- this type of cash if you don't see a really good deal. So this is a growth driver in short, which we are saying, all right, great. This we make because we can increase growth.

[Thomas Heath]

Thank you. That will have to be our last question. Thank you very much.

[Oscar Werner, Chief Executive Officer]

Thank you all for your interest.

[Roshan Saldanha, Chief Financial Officer]

Thank you very much.