Sinch AB (publ)

STO:SINCH

Earnings Call Transcript 2022-Q4

[Operator]

Good day, and welcome to the Sinch Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Thomas Heath, Chief Strategy Officer and Head of Investor Relations. Please go ahead.

[Thomas Heath, executive]

Thank you very much, operator. And good afternoon, everyone, who is joining us today for this results presentation for Sinch's Fourth Quarter 2022. My name is Thomas Heath. I'm Chief Strategy Officer and Head of Investor Relations. With me today are CEO, Johan Hedberg; and our CFO, Roshan Saldanha. And with those opening remarks, I'll have the word over to you, Johan.

[Johan Hedberg, executive]

Thank you. Thank you, Thomas. And I think we can move directly to the next slide. So outlined here are the 3 priorities we presented back in Q2 '22 results, executing on them in the stated order of our priority. Starting with the cost control, we announced the cost reduction program in summer, targeting SEK 300 million in gross savings.

Next slide. When we look at Q4, we can conclude that our cost reduction plan has delivered faster savings than anticipated. Around half of the targeted SEK 300 million savings has been realized. The chart shows how adjusted OpEx has developed. Yellow part show OpEx added from acquisitions in late '21. And green part show organic development, where you see a flattening out after a sharp increase from early '21 to early '22.

Q4 adjusted OpEx in SEK is 2% higher than in Q2 '22 but 12% lower in constant currencies. There are positive onetime items in Q4 that reduced costs by around SEK 60 million. In constant currencies and excluding these onetime items, adjusted OpEx is 8% lower in Q4 compared to Q2.

Next slide, please. We targeted a 10% cost reduction in messaging and central functions, which is a little bit more than half of the OpEx space. We can now see that the total restructuring charges will be lower than anticipated. We now estimate them to reach SEK 80 million.

Next slide, please. Higher adjusted EBITDA in Q4 '22 than in Q4 '21 on a full pro forma basis. This includes all entities in both periods. As we said in Q3, the fourth quarter is normally a strong quarter, which also means we normally have a sequentially lower EBITDA in Q1.

Next slide, please. As in Q3, cash flow is strong also in this quarter. Cash flow from operating activities close to SEK 1 billion. One clear focus area has been reducing our overdue accounts receivables, and you can see on the chart that we have reduced DSO further to 60 days. So our key priorities for cost control, cash flow and growth, we see a positive development on the first 2. And we're, of course, happy with the current growth rate, especially in the messaging segment.

Next slide, please. Total growth is healthy with revenues growing 41% and gross profit 79% compared to Q4 '21. We have a strategy of combining organic and acquired growth. And we see here, of course, that acquired growth contributed significantly.

Looking at organic growth, excluding M&A, it makes more sense to look at the pro forma figures for earnings from the acquisitions closed in late '21 are included from first of October to 31 December in both '21 and '22. We will see pro forma revenue growth in constant currencies declining 1% year-on-year and gross profit increasing 3% year-on-year. The primary driver is reduced volumes in some marketing use cases, which we know from the past are more affected by business cycle. Q4 was softer than normal -- compared to Q4 in previous years for the messaging segment.

And looking into the segments in more detail. Around messaging, we have a negative growth with revenues down 5% and gross profit down 8% in constant currencies. The large contributing factor is reduced pricing and volumes with one of our largest customers. This customer is shifting focus from growth towards profitability, which means some business is reassessed and exited. This is the same customer where we adjusted prices in Q2 '22. Excluding this one customer, gross profit growth in messaging would have been positive in Q4. Here, the comparables will get somewhat easier from Q2 '23. But in Q1, we still face tough comparables.

For voice, revenue growth at 4% and GP growth at 6%. Here, we continue to have a 5% headwind from 8YY reform. Our growth rate here is helped by strong demand for our number of education products, but you should be aware that the comparables in this area will get more challenging during the year.

E-mail. E-mail is performing well with 19% revenue growth and 20% growth in gross profit. The cloud migration project, where we change vendors to achieve a more competitive cost structure, has now been completed.

For SMB, revenue growth is 16%, and gross profit growth is 24%. We have highlighted a negative onetime effect in the base, which has a 12% positive effect on the pro forma growth rate in Q4 '22. So underlying GP growth is at 12%, which is in line with Q3. What is happening under the hood here is that growth in North America SMB offerings continues very healthy. But at the same time, there are pressure on the installed base in Australia.

So coming back to the bigger picture, we, of course, want to see higher growth rates than we current see, especially in the messaging segment. This takes some time, of course, and the macroeconomic environment remains uncertain. This means that we are not expecting an immediate improvement. However, there are multiple initiatives ongoing, where we are investing to increase our mid- and long-term growth. We are investing in product integration, make it easier to consume multiple Sinch products.

Most of our customers still use only one product. One such area is developing our voice offering and making more features available via sinch.com. We continue to integrate acquired platforms and move traffic to our mobile platform, both in messaging and SMB. Lastly, we also continue to invest in APIs and software for conversational messaging. Since we have a profitable and cash-generative business, we are able to make targeted investments also in a more challenging environment.

So thank you, and handing over the word to our CFO, Roshan.

[Roshan Saldanha, executive]

Thank you, Johan, and good day to you on the call. This is Roshan Saldanha, Chief Financial Officer at Sinch. I will walk through the financial results in more detail. Please turn to Page 10, where I speak on the fourth quarter highlights.

We are satisfied to see a good development in the cost reduction program, delivering results faster than anticipated. Around half of the targeted SEK 300 million gross savings have been realized, and adjusted OpEx in Q4 is 12% lower than in the second quarter of last year on a constant currency basis. The OpEx is helped in the quarter with about SEK 60 billion. And excluding that, it would have been 8% lower in Q4 compared to the second quarter of 2022. We also see margin stability and retain good pricing ability due to the superior quality and value that we deliver for our customers. Gross margin in the quarter was at 33%, up from 26% a year ago and 1.4% up from pro forma Q4 2021.

On the second priority of cash flow, we have yet another quarter with strong cash flow. Adjusted EBITDA was at SEK 960 million, and we had improved cash flow from operating activities at SEK 973 million. This means that we were able to take our leverage KPI of net debt over adjusted EBITDA, excluding IFRS 16 leases to 2.7x compared to 3.2x at the end of September 2022.

Please turn to Page 11, which shows a bridge explaining our underlying gross profit development. In the fourth quarter, we had organic gross profit growth of up 2% and pro forma organic gross profit growth of plus 3% on a constant currency basis. We focus on gross profit when we assess and steer our business. Consolidated gross profit rose by 79% during the quarter 2 SEK 2.4 billion, and gross margin improved to 33%. The Swedish kroner weakening against major currencies had growth by SEK 150 million or 12 percentage points, and the acquired companies during the last 12 months contributed 65 percentage points of gross profit increase.

Looking more closely at the individual segments. In messaging, we have an organic growth in gross profit, in local currency and in comparable units at minus 8%, which is due to price reductions with a large customer previously announced in Q2 and weaker traffic compared to last year in the fourth quarter.

Moving on to voice. On the pro forma and organic basis, excluding foreign currency effects, growth in the voice segment was at 4%. This includes a negative effect from the 8YY regulation change in the U.S. [indiscernible] .

In the e-mail segment. On a pro forma and organic basis, growth was at 20 percentage points. And in SMB, it was at 24%. The SMB segment is affected by a one-off negative impact in the base in Q4 2021 prior to acquisition. And excluding that, the growth would have been 12%, which is similar to what we had in third quarter of 2022. Growth in the U.S. market continues to be strong for SMB, but that is offset by slower growth among larger customers in Australia.

Moving on to Page 12. You can see that the numbers on the slide are on a pro forma basis, including all completed acquisitions, and it shows also gross margin stability, which reflects the strength in our product proposition towards customers. We believe that we can improve this over time as higher-margin products are growing faster. Q2 2022, as you know, was affected by a reassessment of reserves for the crude traffic costs with SEK 162 million in the messaging segment. Adjusted EBITDA margin also continued to be stable at 13% and is supported by the benefits of our cost structure program, where half of the targeted savings are now realized. Adjusted EBITDA margin in the messaging segment was 8% for the quarter.

I'd like to move on to Page 13, where we have the income statement. Consolidated net sales grew by 41% in the quarter to SEK 7.4 billion. The growth rate in the quarter was positively affected by previous acquisitions. On an organic basis, in local currency, the growth was minus 2%. And on a full pro forma basis in local currency growth would have been minus 1%.

Other operating income includes foreign exchange gains related to operating items and reversal of a previous acquisition. EBITDA for the quarter was SEK 791 million, up from SEK 330 million a year. One-off items, as I have referred to already in operating costs, helped the adjusted EBITDA by SEK 60 million in the quarter. Adjusted EBITDA per share came in at SEK 1.13 for the quarter versus SEK 0.61 during the same period last year. We made goodwill impairments related to the e-mail segment in the third quarter of 2022 of SEK 5 billion. And in this quarter, we have the currency effect related to that impairment of SEK 97 million. EBIT came in at SEK 66 million for the quarter versus minus SEK 12 million in the same period previous year. Acquisition-related amortization, which does not affect cash flow, was SEK 587 million. Adjusted EBIT, which excludes both items affecting comparability and amortization of acquisition-related intangible assets, was at SEK 919 million versus EUR 393 million during the same period last year.

Moving on to Slide 14, which shows the cash conversion. You will find a bridge from adjusted EBITDA to cash flow before changes in working capital and explaining the effect between these items. As in the previous quarter, we can calculate cash conversion after interest statements, taxes, changes in working capital and investments in CapEx. In the quarter, we have a continued strong cash conversion. We see a cash flow generation before changes in working capital of SEK 661 million. We see total cash conversion of 82% in the quarter, which is aided by a positive change in net working capital. Even if we exclude the positive gain from net working capital, this cash conversion is still at 50%. On average, over the last 12 months, we have a cash flow conversion of 60%. Note that interest rates have come up. Effective interest rate in the quarter was 4.5% on an annualized basis. We also expect working capital to be more lumpy, and we will -- we do think we have unlocked a large amount of working capital that was lost when we started the year.

Please turn to the full capital statement on Page 15. We see a strong development in conversion of adjusted EBITDA to the free cash flow from operations. Cash flow from operating activities after change working capital was SEK 923 million for the quarter. Net working capital as a percentage of sales continues to be low at around 6%, which shows the asset-light nature of our business. In addition, during the quarter, we amortized about SEK 600 million of loans, and the group had a closing cash balance of SEK 2.1 billion. In addition, we had available bank overdraft facilities of SEK 930 million.

Moving on to Page 16, where you see the net debt over adjusted EBITDA, which is affected by 3 components: adjusted EBITDA growth; cash generation from operations; and currency impacts, which are immediate on debt but we had a trading impact on earnings. EBITDA growth and strong cash generation caused net debt EBITDA to fall in Q4 versus Q3. We expect continued deleveraging from earnings growth and cash generation. In the quarter, we also extended maturities for about SEK 6.5 billion and USD 110 million of existing credit facilities by year to 2026.

And then moving on to Page 17. We reiterate our financial targets to grow adjusted EBITDA per share by 20% per year and to keep net debt over adjusted EBITDA below 3.5% over time. Adjusted EBITDA per share grew 104% in the fourth quarter measured on a rolling 12-month basis. And net debt to adjusted EBITDA is at 2.7x, which is well within our financial goals, and we expect to continue to deleverage. For the last 12 months, there is no difference between pro forma and reported adjusted EBITDA, but this KPI excludes the impact of IFRS 16-related lease debt on both net debt and adjusted EBITDA.

With those comments, I would like to hand over back to Johan to summarize today's presentation and open up for Q&A.

[Johan Hedberg, executive]

Next slide, please. So again, I want to reiterate the priorities we set in Q2 '22 and which we have been delivering on since then. We launched and executed a cost reduction program, where we realized half of our targeted SEK 300 million gross savings in Q4. We reported a record adjusted EBITDA number for the company. We have improved our cash flow and managed to convert some 60% of adjusted EBITDA to cash flow in '22. Many parts of the business performed as expected, but we can improve growth rates in our messaging segment.

Looking holistically at our entire business, we have a healthy business, stable margins and a very diversified earnings call. There is still potential to extract further cost and revenue synergies from the acquisitions closed in '21. We believe we are well positioned to advance our position in the marketplace.

[Thomas Heath, executive]

Thank you for that, Johan. And with those concluding remarks, I hand the word over back to the operator for questions.

[Operator]

[Operator Instructions] The first question today comes from Predrag Savinovic with Carnegie Investment Bank.

[Predrag Savinovic, analyst]

Could you reason a bit on the market and the competitive landscape, the market growth and the opportunities you see now? I know this is a broad and strategic question. I get that. But what I'm getting at is that pretty much all of your competitors are doing quite drastic things, which is refocusing very much on margins and cash flows. And of course, they start from -- some of them start from losses. But they're reducing staff quite significantly, having marketing R&D, raising prices, et cetera. And I'm just wondering if this gives you any opportunities. And if so, what kind? And also on your recent customer wins, do they have anything to do with this behavioral change from some of your peers?

[Johan Hedberg, executive]

I think for the enterprise segment, we are seeing that, I would say, the competitive environment is softening somewhat. So we feel that we have a very strong position in that marketplace, and I think we look forward to 2023 and some of the cross-sell opportunities we have with our enterprise customer base.

[Predrag Savinovic, analyst]

All right. And the 50 new customers you're signing messaging, can you put that in relation to maybe your net customer growth in the previous quarters? And could you also quantify what this could mean in terms of gross profit once they're scaled fully?

[Thomas Heath, executive]

Thomas here. I think the -- we continue to see a healthy inflow from new customers as we did in Q3. Should bear in mind that in the messaging segment, we're talking about larger customers. Smaller customers will sign up for our SMB offering or use our e-mail products. So these are large customers, which take a few months to sign or close and then further months to ramp and show for the volume. So it's a little bit of a lagging effect in terms of customer acquisition on the landscape. It's a satisfactory performance. Of course, the overall growth is impacted by many factors. Expansion is an important one, next to customer acquisition as well.

[Operator]

Next question comes from Stefan Gauffin with DNB.

[Stefan Gauffin, analyst]

Yes, a couple of questions. First of all, with a bit weaker demand especially in messaging and voice and in combination with faster-than-expected results from the cost program, why aren't you looking at expanding the scope of the cost program given the uncertain outlook? Secondly, I saw that you are looking at raising prices in the first half. I mean given the weaker volumes and weaker demand, if it's the right medicine to raise prices in that environment. Just your thoughts on these 2 questions, please.

[Johan Hedberg, executive]

Yes. If I start with your last question, we analyze what customer segments that we can raise prices for, and we will not raise prices across the line. It's for specific customer segments where we believe it will be successful. And then we have the uncertain outlook and potential further cost reduction programs. We're, of course, following carefully how the business develops. But as of now, we do not have any further plans for cost reduction programs.

[Operator]

The next question comes from Daniel Thorsson with ABG.

[Daniel Thorsson, analyst]

Two questions. The first one is on the mid- to long-term EBITDA margin here. When you announced the acquisition of Pathwire 1.5 year ago, you showed a margin graph with a pro forma level of around 16% for all the combined entities. Is that something that is still reasonable for the mix of businesses you have today a couple of years out? Or has anything changed in the last 1.5 years that does not make that figure reasonable today, for example?

And then secondly, now when you delever and generate positive free cash flow and we see competitors are struggling a bit more, what needs to happen to be in a better shape for M&A or for you to look at smaller targets in the market?

[Roshan Saldanha, executive]

I can take the first one. Roshan here, and then I'll hand over to Johan to answer your second question. On EBITDA margin, I think that's fine that you're referring to was historical pro forma. I think in reference to the one's previous answer, we do see the potential to increase efficiencies. We have just ordered together these different organizations, and we see synergies both on the revenue side and on the cost side over time to be realized. I think it's a bit too early to kind of talk about mid- to long-term target, and this is not something that we had forecasted before, but we see the potential to increase.

[Johan Hedberg, executive]

And for M&A, I think we continuously scan the market, and we are in a better position now than we were a couple of quarters back. I think main targets right now would be targets that adds -- that are financially accretive.

[Operator]

The next question comes from Akhil Dattani with JPMorgan.

[Akhil Dattani, analyst]

Can I maybe ask question around the outlook? Obviously, you sort of helped us understand the way you're thinking about growth versus profitability. But I just wanted to dig a little bit deeper into how you're thinking about the shape of trends over the coming quarters. In the press release, you talked about not expecting any immediate improvement in growth rates going forward. I just wanted to clarify what that means. I mean are we talking about relative to the organic growth rate in Q4? Are you coming in some other ways? If you could maybe just help us understand what you think about what you're talking about there, so we understand the shape of the coming quarters.

And I guess a very similar question on margins. You've had 2 good EBITDA margin quarters in the last couple of quarters. Is that a sort of reasonable run rate as we think about that going forward?

And then the second one is just on management. In your press release, you talked about quite a lot of management changes across the divisions. I just wondered if you could talk us through how that impacts, if at all, the integration processes. Does that create any challenges?

[Johan Hedberg, executive]

Thank you very much. I'll start the comment here. I'll start with the first one. I'll hand over to you. So for what we talk about the perception about the immediate future, we're referring to the full company on a pro forma perimeter, pro forma organic perimeter, noting what we alluded to earlier that our comparables in Q4 and also into Q1 are quite tough. Some comparables are easing further on in the year. But at the same time, we have a quite an uncertain macroeconomic environment, so there are also puts and takes as we look further out. We just note that we had some quarters last Q4 and also a strong quarter last Q1, so that's what we are referring to.

In terms of the sequential pattern we see, pro forma figures for Q4 '20 -- for last year, so you should have some indications in the sequential guidance Q4 to Q1 if you want to look at the near term. Roshan?

[Roshan Saldanha, executive]

Just adding maybe a little bit of commentary on the individual segments. So that one, I think what we've said here is that in Q4, we had -- we were not satisfied with organic growth in messaging and voice. We think we see a growth pattern in the email segment, which is improved by improvement in the gross margin. And SMB continues on the same trend that we have seen in the third quarter. So there's a little bit of a difference between the segments.

On EBITDA margins, I think the only thing we can say is that if we have a good and stable -- it's very much dependent on revenue and gross profit, I would say, in the short term. So we have a stable revenue and gross profit, which we expect to have, then we don't see any reason why there should be a worsening of EBITDA margins. And with that, I'll hand over to Johan for the last question.

[Johan Hedberg, executive]

Yes. And I would say we now have a management team that can successfully integrate the different assets we have acquired over the years, creating more of a One Sinch since experience for our customers and also successfully extract revenue and cost synergies going forward.

[Operator]

The next question comes from Laura Metayer with Morgan Stanley.

[Laura Metayer, analyst]

Two from me, please. One, could you give us an update on the basic versus advanced messaging mix in the messaging segment? And could you comment on how the advanced messaging segment is doing? And then the second question on EBITDA margin. So your Q4 adjusted EBITDA margin was broadly stable quarter-on-quarter and year-on-year. Could you give us an indication of the evolution when removing the one-off recurring items and FX tailwinds, please?

[Johan Hedberg, executive]

Thank you. I'll start off with the first one, and I'll take Roshan's help for the second one. We might -- please repeat that question. But starting off in messaging, there are multiple ways to cut and size the market for analytical purposes in terms of what we have more concrete base on. There's different types of communication channels. So SMS, RCS, Telegram, Viber, KakaoTalk and so forth. As you know, we have what we believe is a market-leading offering in terms of breadth and width of messaging channels.

In terms of use cases, it's a little bit more of a sliding scale, and it's hard to apply that type of segmenting in which we can find in anything in reports to industry analysts. It's hard to apply that in a structured way to realize data, so we don't have to bring it that way.

In terms of looking at the different communication channels, we continue to see fragmentation in messaging and a quite diverged development across different geographies where in particular WhatsApp is continuing to perform well in India and Brazil. We are successful with Telegram in other parts of the world. And it's a little bit of a mixed picture. We also see RCS in certain countries starting seeing traction. So a little bit of a mix picture. These new conversational channels, of course, tend to be used for more advanced use cases but a more conversational in nature.

I think your second question was on -- perhaps you can repeat a little bit on the EBITDA and EPA margins.

[Laura Metayer, analyst]

So your EBITDA margin in Q4 was around 13% of revenues, and in Q4 last year was around the same. Q3 this year was also around 13%. But I understand you had some FX tailwinds and also some tailwinds from one-off recurring items in Q4. Does that mean the margin actually decreased quarter-on-quarter and year-on-year in Q4? If you could help us understand that, that would be great.

[Roshan Saldanha, executive]

I think the only commentary -- the only difference in the fourth quarter is the one-off comments that we have laid on SEK 60 million in operating costs, which helped us in the fourth quarter. But besides that, I mean all other effects are consistent over the quarters. We have an FX headwind on gross profit that we highlighted. We have, of course, an FX headwind on the operating costs, which nets out the part of the gross profit segment.

[Operator]

The next question comes from Andreas Joelsson from Danske Bank.

[Andreas Joelsson, analyst]

Two questions from me. First of all, looking into 2023 and the growth uncertainty that you see, and you mentioned that you are investigating or looking into future-looking investments. In that perspective, how do you look at the overall target on EBITDA per share, bearing that in mind of 20% growth?

And secondly, maybe a follow-up to the previous question on the messaging volume. You mentioned that you have seen wholesale coming down, one large customer reducing volumes. Do you see any other similar risks in the portfolio you have of messaging volumes? Or how should we see that going forward when we look into 2023?

[Roshan Saldanha, executive]

Maybe -- Roshan here. I can start at the first one, and then I'll let Johan answer the second. The -- on the EBITDA per share, that's a target that we reiterated this quarter that we want to grow it to 20%, of course, representative to gross profit development, and we need to continue to watch it closely. But we have some cost savings, of course, that should help us during the coming quarters, and this is something we will continue to watch closely to be able to deliver to our target. Johan?

[Johan Hedberg, executive]

Yes. No. So I think there is in the messaging segment, and we talk about it in the report that the marketing use cases. I think Q4 is sort of marketing heavy with the big shopping routes and so forth. We have less so than in the coming quarters, but that is the use case that we all talk about in Q1. And in terms of customer concentration, customer concentration for the entire group has come down markedly and is less successful than it was in previous years.

[Operator]

[Operator Instructions] The next question comes from Klas Danielsson with Nordea.

[Klas Danielsson, analyst]

Yes. So just a quick follow-up on the pricing side and what you talk about, but with customers becoming more price sensitive. Could you maybe elaborate on what types of effect that is materializing us? Are you seeing kind of any customers staying with Sinch and moving some volumes to other competitors? Or what's that materializing us?

And then secondly, also, I wanted to follow up on the operator behavior on the pricing side. Basically, if you could elaborate a bit on what you're seeing in terms of trends there.

[Thomas Heath, executive]

Thomas here. I'll clarify the first question. I will hand over to Johan for the second part. So what we're alluding to in terms of price [indiscernible] is that [indiscernible] is really related to some customers, some larger customers in our messaging segment and our voice segment. It's where we have customers or software vendors either resell or embed our offering into another software product. So we're not thinking about banks or airlines or hotels, more technology-oriented companies and service providers. Like ourselves and many other companies in this environment, these companies are scrutinizing their costs and looking at every line item in our P&L. And that just means that price gains more importance to the ongoing discussions with vendors. We are very comfortable that we are maintaining or increasing our share of wallet with these customers. We have a privileged position based on a long track record of delivery and recognition for the high-quality that we offer, which maps well to the special part of customer segment. So this really, I don't want to exaggerate how much of the customer base is related to, but even a few large customers can have an impact. And also, we don't really see this in the SMB [indiscernible] segment, which are more long tail-oriented. Then I think there was a question on carrier price, Johan.

[Johan Hedberg, executive]

Yes. Can you please repeat that question? Would be great. Thank you.

[Klas Danielsson, analyst]

No, it's just a very broad question on what you're seeing operators doing on pricing currently. And basically, what your visibility is also on that side in 2023, if you can maybe elaborate a bit on what trends you're seeing there.

[Johan Hedberg, executive]

No, I think we had some of that in previous years. But going into 2023, we don't see that, that will affect our numbers in any specific way.

[Operator]

The next question comes from Mohammed Moawalla with Goldman Sachs.

[Mohammed Moawalla, analyst]

I had 2 questions, please. One, just as we look at the top line evolution -- you obviously talked about some of the challenges -- when do you expect the business to potentially kind of come back to sort of market growth rate on a kind of organic gross profit basis? And do you feel the need to potentially reinvest some of the savings from the cost-cutting program to stimulate that acceleration?

And then secondly, obviously, on the working capital movements, this quarter, it was driven by increase in accounts payables. If we look at things like the receivables and DSOs have come down to 60 days in the fourth quarter. Are we kind of approaching a floor on the DSOs? And how much more working capital improvement can you drive, particularly on the kind of DSO side?

[Johan Hedberg, executive]

Yes. So on the investment, we are investing in initiatives, especially around product integration, making all our products available on digital channels and also to have all our sales team sell complete product portfolio, and so this is a cross-sell effect. And we are -- probably in 2023, the digital channels, we will not see the effect. But for cross-sell with field sales teams, we should be able to see effects in H2 '23, although from a small level.

[Roshan Saldanha, executive]

I think on the second question, Roshan here. I think if you look at the working capital impact that we've had, we are currently operating at about 6% of revenues. This reflects the asset light nature of our business. In this quarter, we have both DSO and DPO contributing to working capital release, DSO increased from 69 to 60 on a year basis. But even compared to the last quarter, DPO increases as well, but within rates this quarter. Now when you look forward, I think on a structural basis, we do see the possibility to improve working capital over the longer term, but I think the large part of the short-term unlocking is behind us now. So we see now we'll be reverting to a more normal range of working capital movements, which can be [indiscernible].

[Operator]

The next question comes from James Pavey with Bank of America.

[James Pavey, analyst]

A quick question on visibility on volumes over the rest of 2023. You called out earlier that you've got a big impact in Q4 from marketing. Are you worried about any spillover effects into other segments like e-mail, where I think from your deal presentation, you had about 40% on marketing and 60% on transactional emails?

[Johan Hedberg, executive]

Yes. I think that the -- yes, the volume patterns, of course, vary a little bit by product, geography and customer segments. Generally speaking, the trajectory for e-mail is quite optimistic. E-mail is a very cost-efficient channel for marketing with a very high ROI for enterprises who use it. It's quite a different value proposition than using, for example, messaging channels. These are more expensive and more premium nature. We can also have a high ROI when deployed correctly. So it's a little bit different between the different channels. We highlighted a few headwinds in terms of volumes. Brazil being one of them, which has held up. Whereas India, for example, have recovered and is doing very well. Volume growth in Q4 is also affected by our conscious choice to prioritize profitable growth and profitable business in general, which means we opted to move away from certain -- essentially where the margin profile has not been attractive enough.

[Operator]

The next question comes from Stefan Gauffin with DNB.

[Stefan Gauffin, analyst]

Yes. Just a quick follow-up on the Pathwire. When was the migration to the new cloud infrastructure completed? Was it beginning or end of the quarter? Just to understand the margin development.

[Johan Hedberg, executive]

Stefan, this was a phased migration, I would say, over the second half of the year. So it was completed gradually through the second half.

[Operator]

The next question comes from Andreas Joelsson with Danske Bank.

[Andreas Joelsson, analyst]

Yes. Just a follow-up on the cross-sell potential and the execution, if you could provide us with some date on where you are and what you see ahead and where the challenges are, your learnings so far. What is the main hurdles for the ones that are using 1 product to go to 2 products.

[Johan Hedberg, executive]

Yes. So a little bit different depending on the sales motion in our -- if you think it's an existing messaging customer, where we have an account manager and a field sales model, then it is actually similar to onboarding a new customer with a difference that we will have passed a lot of hurdles and requirements, security clearances and so forth. And we'll have a foot in the door as an existing vendor on an adjacent product, right? But other than that, the onboarding process in a deal sales scenario [indiscernible] customer.

On the product-led growth side, so think about the 100,000-plus developers who use our e-mail product. They're not interacting with our sales teams directly. The sales process is carried through the product. That means that to cross and upsell, we need to expose and build out product features and functionality so that when, for example, you log into [indiscernible] , you will be exposed in one way or the other to our matching offering, our [indiscernible] offering, our OTT offering. So a little bit different, whether it's sales-led cross-sale or product-led growth that we're looking at. And of course, both are focus areas for us.

[Operator]

We are now coming to the end of our session. I would like to turn the conference back over to the company for any closing remarks.

[Thomas Heath, executive]

Thank you very much, operator. And thank you, everyone, who dialed in today for the continued interest in our business, and I'll leave over to Johan for some concluding remarks.

[Johan Hedberg, executive]

So finishing off with just summarizing that we're already set in our 3 priorities, very pleased with the execution on the cost control and on EBITDA and cash flow. We can improve on all the growth rates, especially in the messaging segment.

[Roshan Saldanha, executive]

Thank you, everybody.

[Thomas Heath, executive]

Thank you very much.

[Johan Hedberg, executive]

Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.