Sinch AB (publ) (SINCH) Earnings Call Transcript & Summary

Good day and thank you for standing by and welcome to the Year-End Report 2021. [Operator Instructions] Please be advised today's conference is being recorded. [Operator Instructions] Now I'd like to hand the conference over to your speaker today that's Thomas Heath. Please go ahead.

Thank you very much, operator. Warmly welcome everyone to the Sinch Q4 2021 conference call. My name is Thomas Heath, I'm Chief Strategy Officer and Head of Investor Relations. And with me as presenters today, we have our CEO, Oscar Werner and our CFO, Roshan Saldanha. And with those introductory remarks, I'd like to hand the word over to Oscar.

Thank you, Thomas and thanks for everyone listening for the interest in Sinch. So without further ado, let's move into the slides. So, operator, if you go to Slide #2 please. So this is a as you know a transformative quarter for us and with the closing 3 large and one small acquisitions in the -- at the tail end of the quarter, very happy to close all of these acquisitions and we think it puts us in a very strong position going forward. And so on net sales past 12 months up to SEK 16.2 billion, the adjusted EBITDA being past 12 months SEK 1.3 billion. We are now 4,000 or little bit about people, 62 countries and we're a global leader and truly a global leader in cloud communications and mobile customer engagements. We now have over 150,000 customers adding the strong customer basis from both Pathwire with strong developer go-to-market and MessageMedia with a strong SMB go-to- markets. We're scalable cloud communications platform for messaging, e-mail, voice and video and we can say we're a true leader in all the 3 first of those. We do more than 600 billion engagements per year and if we count the messages, the e-mail and the voice calls on a number of calls and mind you, if you count this -- if you do an average on the number of touch mobile phones on the planet, we touch every single mobile phone on the planet, roughly 80 times per year. So on average touching every single mobile phone 80 times a year on average, I'd say really strong statistic and I think it shows how strong this market is. This is really a market which is in between communication between every single consumer and every single enterprise or business on the planet. We also started 8 out of 10 large US tech companies and we have been profitable since our foundation and we continue on that track to drive a strong and profitable business. Operator, if you go to the next slide please. Really significant for this quarter, I mean the biggest event is closing these transactions and really us transforming into a global leader. And if you look at the Gartner approach major vendors within CPaaS they would put us Twilio as Twilio and into bypass the as the mega providers in this business. Then there are a set of smaller ones and you can probably go into a couple of regions and I had a couple of names there and then there are smaller people being hundreds of them, local, local, local or regional competitors, which there are quite a lot, mind you, this is a very, very large market. And we believe that being one of the top 2 providers in this market really puts us in a very strong position with the world's largest enterprises. We believe offering global CPaaS services across all channels at scale at the global level, win a unified application or SaaS layer on top 2 global enterprises will be few players that can actually take that position. And right now we're definitely going to -- one of the very few that can actually do that and we're happy with that. And you can also see this in our gross profit and broadened product mix, I mean 2020 we did 2.1 billion gross profit in SEK, 2021 some SEK 4 and 2021 pro forma is close to SEK 8 billion basically. You can also see the -- you can also see the diversification of our business being on the pro forma basis 11% on the SMB side, 11% on e-mail, 32% on voice and then 46% on the messaging including -- including our applications business. And so you've seen and all of these businesses are strong and profitable and growing in the wrong -- right, you can see a strong diversification and you see both on the gross profit, on the growth side, but also on the profit mix and we're very, very happy with the position we have taken into this market. And that said, operator, go into the next slide please. Then if we jump into the shorter-term, that was the kind of the long-term really strategic position we take. If we talk into the shorter-term, looking at the fourth quarter. Again, we have strengthened the position as a global leader in CPaaS, net sales growing 74%, gross profit 69%, adjusted EBITDA 25%, adjusted EBITDA SEK 475 million and operating cash flow of SEK 462 million for this quarter. Transformative acquisitions positioning Sinch as a leading profitable CPaaS company. On a full-year pro forma of SEK 23.1 billion and GP of 7.7, I think that's a very strong position we have taken. Now Q4, we have a set of factors affecting organic growth. First, we should all know it's a strong comparison quarter. We had a really strong quarter last year. In this -- so the comparison between Q4 2020 is strong and that's both on the gross profit level and it's on the adjusted EBITDA level since we were holding OpEx in term -- in order to be safe side on the COVID effects. So we were holding up OpEx in the middle of the year and therefore we have a lower comparable OpEx growth rate in that quarter basically. So both strong on EBITDA and the gross profit. The other big factor affecting organic growth in this quarter on the gross profit side is the -- we had a minimum commitment to one multinational mobile operator where you commit to a certain volume in order to get the sort of set a price. And a couple of things turned bad in this deal, so we had a lower traffic volume and beside a SEK 34 million or SEK 34 million negative effect on gross profit in Q4, that's around about a 5 percentage point in growth, if we would not have had this deal. This is a one deal and it's a time-bound deal. We believe we have served all the negative effect for this deal in this quarter, but it's obviously hard to know exactly. In any case, this deal is ending in June of 2022. Doing this company is a small part of our business, sometimes you do it when we see a good opportunity. We believe this was a good opportunity, but it obviously turned in a wrong way for us and we have seen very few of those mistakes earlier, but in this quarter we did. We had another effect in this specific quarter which is a bad debt relating to one customer, adding SEK 37 million to OpEx in Q4. This is another one of this, we have been good in managing bad debt relatively and historically have had very low bad debt numbers. In this quarter we had a -- we had a significant bad debt and we reserved SEK 37 million for that and in order to -- in order to account for that. Also one of these one-offs, which we have not seen before in this quarter one of those customers slip through affecting this quarter's performance. We also do see in the market effect of competition and we had -- as we previously communicated price adjustments to larger customers as a result of the strong market competition. We believe in general stand strong. This is a market with very high economies of scales. We have the largest volumes and have very large economies of scales. In this quarter we have as you've seen, we have had higher revenue growth, but lower gross profit growth, so keeping market share but being lower on the gross profit growth side and as a result to the competition in the market. This is something we're going to look at going forward on how do we keep gross profit growth at a good level. Focus areas we're trying to term 2, first, capitalizing on the strong market position to drive growth. We have a very strong position and large cross-sell opportunities and in principle every single messaging customers we have, have an e-mail, have an e-mail provider and really doing cross-sell there. Same thing on the e-mail side, they also use -- they use messaging in various forms. Same thing on the voice side, how can we cross sell all of these different customer basis and I can utilize our joint offering in order to really be a more full service provider to the largest enterprises, that's something we're very positive about and looking forward to. Obviously and needless to say, we also need to do cost control in messaging and group functions to ensure that costs do not grow faster than gross profit, we have a structure strategy of growing OpEx in line with gross profit. Now in this quarter, it's sometimes hard to time exactly how will the gross profit and OpEx look, OpEx you can time, but gross profit is a little bit harder to time. And so therefore we have a little bit of a mismatch between OpEx and gross profit growth in this quarter and not something we will adjust going forward in our messaging business and in our growth -- in our group functions going forward. Obviously in this quarter is always hard, I mean we're doing a -- we're doing a large scale up. So it's in that -- in that it was a little bit of a special quarter where we had to take cost in order to make sure we close these transactions and get them in a set of group functions. So it's a tough quarter to keep OpEx at a reasonable level when you're actually doubling the business in the same quarter. But needless to say, we have strong focus on that going forward. Then we also have a new operating model with full P&L responsibility for the business units presence which we believe it will drive a lot of cost-consciousness, but we're also very happy on being able to operate the business into 5 business unit that can fire on going from firing on one cylinder to basically firing on 5 cylinders with leaders of each one of them. Operator, if you go to the next slide please. On the gross profit side, if we break that down. So as you see Q4 '20 and then we had organic growth of 5%. And then you see the various factors of acquisitions and moving up to the 69% total gross profit growth for the quarter and you see the buckets they fall into. And again like we said, Q4 tough comparables to Q4 2020 one -- is one of the reasons, the other one is the minimum commitment to this one global mobile operator, it's a time-bound thing. We think we have reserved everything, but the contract is actually ending in June -- in June 2022. Without that we would have had a 5% more gross profit growth, so being up 10%. Second thing -- third thing we talked about is, we have had high price increases in Brazil and India. We have been unable to pass those on to customers immediately that has an effect on the gross profit level, since we have a lower gross profit per message in those markets right now. It also has an effect of if an operator is increasing prices with 30%, even if we get back to the same gross profit level on an absolute gross profit per message, then the percentage gross margin will be a little bit lower, which is important to remember, even though the business is just as sound as it was before. The price adjustments we talked about continue to lower margins. We will work on this going forward both in working with the targets on the sales teams, how much are they prioritizing top line growth versus gross profit growth and gross margin keeping, that's one thing. And working on the cost level with various operators is obviously another. And the third big area which we think is very strong going forward over time is working on a customer level upselling the customers to more software services, other services since we now have a very broad portfolio in the Group. We see good opportunities for increasing gross margin on a per customer basis by just adding more services to each customer. Taking that account, you would have had a 10% underlying GP growth in local currencies, excluding the impact of pre-commitments. Operator, go to next slide please. OpEx, looking at OpEx, it's a little bit hard when you look at the trends, because there are so many things happening when you -- when you drive a company at this very high growth level including -- including acquisitions. So if we start at the left, we had SEK 480 million OpEx Q4 as reported. Now that only took in when we closed SDI in that quarter, it didn't take in the full OpEx run rate or SDI since we only closed it for a set of the weeks there. If you would have had FDI into the OpEx in the entire quarter, just taking the actual OpEx for the entire quarter, the OpEx would be SEK 524 million. Then going into Q4, you add other acquisitions coming there is primarily wavy and the yellow bar there, so you can see the growth in that and you see the OpEx growth from Q1, Q2 to Q3. And then you see Q4 adding a part of the OpEx from the new transactions in the yellow bar on the a set of the month there, all of the error bars are obviously combined with gross profit additions as well. And then looking at the green bar, so let growing really from SEK 524 million to SEK 649 million, which includes the SEK 37 million bad debt. If you would exclude SEK 37 million since we typically have low bad debt, the OpEx underlying OpEx growth would grow with round about 17%. And the 17% is obviously as you see a mismatch versus the -- versus the GP growth that one would be correct. It also has an impact from the scale up, of course, remember that we're -- we are actually doubling the business in Q4 in order to take in those transactions we have, we have added quite a bit OpEx in order to scale group functions to be able to handle it. All of that OpEx in Q4 is weighing the messaging business, even though it's actually related to acquisitions because we didn't -- we haven't closed the acquisitions in Q4. So that's a little bit unfair if you will to the messaging business and we're not to double the business, we would not have grown the size of group function in this way because we wouldn't have the need to, of course. Again, if we go in the commentary, we also had slower OpEx growth in 2020 Q4 due to the COVID outbreak and being cautious there, that's one of the factors. We have increased OpEx pace in 2021 on a run rate basis, reduced sales and product initiatives, [ propellation ] for the large acquisitions and then obviously businesses and yes we have the SEK 37 million onetime impact. So that's -- if you see the OpEx growth, but 17% underlying OpEx growth and including the scale up and then now we need to time OpEx to gross profit as our strategy is to grow those in line. Talking about that, we should think about -- we have several different business units, we're talking about the messaging business with the central functions, which where we think we have a mismatch in the other business units, they may grow faster or slower and we tie in the OpEx growth to gross profit growth in those individual units going forward. So we need to see as a business unit model. All right, if we then operator go to next slide, looking at the new incoming acquisitions and just orient you on the scale and what they are doing. So Inteliquent transaction we closed 9th of December. Adjusted EBITDA in Q4 is SEK 325 million, implying a 26% margin. So very, very strong diversification, very strong and stable profit engine to Sinch Group and we are very happy with this diversification both from a financial perspective because I think it really gives us a strong base with a very strong profit engine, which is good, especially in those weak times. It also very good to add the largest voice network in the US to the group and being able to cross-sell and upsell and drive the growth on the voice side as well. So these 2 things we're super happy with. Inteliquent had a 7% organic net sales growth and a 7% organic gross profit growth in local currencies full-year '21. Looking at Inteliquent, they have a healthy underlying growth driven by enterprise demand for programmable voice, so look at out the segments driving that, it has a good solid growth. You should also understand here that COVID impact on Inteliquent is relatively large, when COVID hit, they had a 30% round about increase in traffic volumes over one week. Then that had tailed -- that has gradually tailed off to maybe be 10% of that level. So growth levels in Intelligent is kind of a little bit distorted by a COVID hike in '19 and '20. So that's why you see definitely an impact on that. We also have a regulatory reform on 8YY number and 8YY what we mean by that, basically calling 1-800 numbers, we're the largest providers of 1-800 providers in the US. So there's a regulatory report which basically means the money Inteliquent makes for each call on an 8YY number is a little bit less than it was before. So basically just the revenue per transaction is going down after this regulatory reform. This is something we knew when making acquisitions. We calculate that into the purchase price et cetera, so we -- no news to us, but obviously that will tail off and make revenue per transaction little bit lower, which will impact gross profit growth on a reported basis in Inteliquent going forward. Still very happy with the business, we knew it when we acquired it, still a very, very strong profit machine, but it will show a little bit lower growth than it would have done out -- without these impacts on the reported basis. MessageMedia a transaction closed 5th of November, adjusted EBITDA of SEK 100 million in Q4 '21, implying a 26% margin. 25% organic net sales growth and 28% organic gross profit growth in local currencies in full-year '21. So very strong and solid sound business, with a diversified customer base round about 65,000 customers, 7,000 new customers started using the web-based product in in Q4 '21. This is a business which basically sells a subscription-based services paying to the local hairdresser signing up using the web-based tool paying EUR100 a month, EUR200 a month, EUR500 a month, something like that. So driven by a lot of customer acquisitions online, signing up online with a very diversified customer base. I think this is a very strong, very happy with the growth and very happy with the profit engine also diversifying base and giving us a strong online web-based go-to-market to the SMB space, which we believe can continue to grow for a large number of years going forward. MessageMedia has also started integration with the Sinch conversation API. They basically sell a subscription-based service of the web tool, primarily the channel they use today is messaging, but they see great opportunities of adding both conversation API, conversation messaging and e-mail and voice to these services underlying and then increasing the revenue they can take the customer. Pathwire, another very strong acquisitions, transaction closed 7th of December. Adjusted EBITDA in Q4 '21 of SEK 113 million, implying a 37% margin, had a 32% organic net sales growth and a 30% organic gross profit growth in local currencies in full-year '21. Strong -- we have -- this is a high velocity developer go-to-market over 100,000 paying customers, so also a good diversification, the strongest we believe a e-mail developer go-to-market machine that there is. So in this area, looking at us versus Twilio, we definitely rival or in the Pathwire team's view actually think are very strong on the development of model versus even a Twilio on the e-mail side. So adding that muscle to our business is very, very strong. We also are very happy to hear, to see a strong early-stage pipeline of cross-sells to Sinch customers. We have closed the first cross-sale transaction. We have a strong pipeline already only a month or 2 after the acquisitions of good-sized customers that also want to consume e-mail. If you look at it, I mean we believe 100% of our messaging customers have an event provider and we think we have a good opportunity of addressing that base with the Pathwire offering. Now this has made us very concrete, basically making a list of 100 customers on the same side, we open the door and then we bring in the Pathwire team in order to sell to those Pathwire experts on e-mail in order to sell to those customers and we do the same thing on the other way. We open making a list of the 100 most attractive Pathwire customers and we open up the door from the Pathwire account manager and bringing in the sales, messaging experts and cross-selling. So doing that, continuing to do that and seeing the strong traction very happy with and we'll do that with e-mail and voice on the SMB side as well, so very strong. Also happy to see that when we pitch Pathwire to our biggest customers, their offering versus existing providers stand strong. Most -- many of our customers are very impressed by the functionality and the scalability of the Pathwire platform. So that's a verification of our theory of this being a very strong e-mail product in the market, which we think will drive good growth going forward. On the operating model side, if we go to next slide, operator please, this is Slide 10. We have decided to as previously communicated run the business out of 5 business unit with strong business unit Presidents running a full P&L of all of them. We have Enterprise & Messaging, which is our messaging business and the majority of the enterprise go-to-market, all our regional teams sit in here. So think about like 80% of the enterprise go-to-market sitting in that. The Voice business unit running the voice product and a voice dedicated specialist sales onto the enterprise side or on to the voice side. Developer & Email has responsibility for the e-mail product also, obviously, but also the developer go-to-market for all Sinch products across all products. Applications, this is a SaaS business. Basically, all the applications on top of the channels, so Chatlayer, MessengerPeople, Sinch4Marketing. So you want to sell a SaaS service on top, this is the unit that has responsibility for driving that. And then we have the SMB unit basically being the MessageMedia business. You can see Enterprise & Messaging being 46% of pro forma gross profit, 23% gross margin, 17% GP growth. Here, we're actually to match with the numbers in the report, excluding ACL in India, but that was the easiest numbers to compare to on an objective basis basically. Voice side being 32% of pro forma gross profit, 46% gross margin and a 7% GP growth, Developer & Email 11%, 77% gross margin and a 30% GP growth in 2021. Applications is currently included in the Enterprise & Messaging and we're working on getting those P&Ls go well and then going on to -- being clear on the splitting between those. And the SMB being 11% of pro forma gross profit, 62% gross margin and a 28% GP growth for 2021. Looking at Sinch, I think it's very important that you look at it at these different units going forward, a very diversified, very strong business with a lot of legs to stand on, but also a lot of cooperation and ability to work together with these and cross sell of each other's products to the other customer basis is a strong opportunity going forward. That said and in order to leave questions -- time for questions, I will not go through the details of the 2022 focus, you can read that at your leisure, but I will leave the word to Roshan to go through a little bit more details on the financials.

Thank you, Oscar and I will give you some brief commentary on the financials from this quarter. Operator, please turn to page 11, I believe though on the title income statement. And I mean, as you know from previous, we focus a lot in our business on gross profit and this is because of the nature of our business where we have costs -- significant cost towards operators to carry messages and voice calls. Gross profit for the quarter ended at SEK 1,348 million versus SEK 796 million in the previous year -- in the previous year quarter and the total growth then being 74% -- sorry, 69%. Adjusted EBITDA which is a measure that we focus on a lot because essentially we exclude certain items that make comparability difficult such as acquisition costs, integration costs, share-based incentive program costs and some operational currency deviation. And adjusted EBITDA for the quarter was SEK 471 million against SEK 378 million a year ago same quarter. EBITDA then was EUR 330 million quarter where we took significant costs for the closing of 4 acquisitions during the quarter compared to SEK 179 million in Q4 2020. Again depreciation and amortization includes noncash amortization where we have certain assets from or a part of the purchase price that we amortize over defined lives. And EBIT then for the quarter ended at minus SEK 12 million, but when excluding these noncash amortization, adjusted EBIT was SEK 393 million, which we believe better reflects the strong cash flow generation in our business against SEK 356 million from Q4 2020. And then finally, of course, net financials were favorably affected by currency gains add of the acquisitions that we closed during the quarter where we had currency to be able to pay for the purchase of those companies. Operator, please turn to page 12, where we reconcile cash flow with adjusted EBITDA, a very strong cash flow quarter in Q4 2021. Adjusted EBITDA SEK 471 million, then turning the cash flow before changes in working capital of SEK 485 million. Again, the key difference being the gains that we have from currency fluctuations which positively affect and therefore provide a cash flow conversion of 103%. But even the underlying cash flow conversion continues to be strong in the business. Turning to Page 13, where you see the full cash flow analysis, where the cash flow before changes in working capital then at SEK 486 million against an adjusted EBITDA of SEK 471 million is then further reduced by a negative change in working capital, which is quite minor this quarter at SEK 24 million. And especially when excluding the impact from acquisitions, that would have been significantly positive change in working capital for this quarter. In addition, of course, we have quite large cash flows out from the acquisition of group companies SEK 28.2 billion, then financed through loans, as well as equity issues resulting in a closing cash balance of SEK 1.8 billion for -- at the end of the year. Please turn to Page 14 operator for a cash flow reclassification. Again, there is no reclassification that has been done in Q4 2021, but this is just as a reminder for the reclassifications that were done in Q3, where we had moved part of the financing for Wavy and also select cash flow items into investing activities from operating activities. So again, just to repeat, there is no reclassification done in the current quarter in Q4 '21. Please turn to Page 15 for the financial target. We have 2 financial targets, we continue to measure adjusted EBITDA per share to grow more than 20% per year and net debt over adjusted EBITDA to be less than 3.5x million over time. Adjusted EBITDA per share grew 12% in Q4 '21, measured on a rolling 12-month basis. And net debt over EBITDA was at 8.1x measured on a rolling 12-month basis. But when including the adjusted EBITDA from all of the acquired entities on a pro forma basis, that net debt over EBITDA would have been 3.2x, which is in line with how we have measured it when we communicated the acquisition. Turning on to page -- or going on to Page 16, where we further provide a bridge of the financial leverage. You can see there that the net debt -- the reported net debt over adjusted EBITDA is at 8.1x. When adjusting for the pro forma EBITDA from the adjusted EBITDA, from the acquired entities, that net debt to adjusted EBITDA would have been 3.2x. In addition, this net debt includes leasing liabilities coming from the acquired entities which when adjusting for the leasing liabilities, we would have had a net debt over adjusted EBITDA, excluding IFRS 16 leasing lease liabilities at 2.9x. With that, I would like to hand back over to you, Oscar, for the last page and any final concluding comments and Q&A.

Thank you. Operator, move to slide -- last slide Transforming into Global Leader, Slide 18 please. So operationally, as you understand from this quarter, I mean, there are 2 really good -- really strong things, I mean driving gross organic gross profit growth in our messaging business, the other business is growing well. So driving organic growth in the messaging business obviously one, very large priority going forward. The other priority is matching OpEx to gross profit growth. In order to match that over time and that's a commitment we have made a commitment we standby and we will do that going forward and we implement the programs in order to do that in the messaging and in the core functions part basically, that's the 2 focus areas. The other businesses we see it separate businesses doing the same thing, but they're all little bit different stages. Then really strong message here on the -- so that's operationally organically what we want to do. We continue on the track we have done in order to drive that going forward. Then important to remember how significant change we're driving here. We really have transformed and are transforming this company into a global leader, being recognized as the top 2 provider in this market basically. And being also -- and if you could take step back, 3.5 years ago, this company was 330 people, now we're over 4,000. And the profit and the gross profit has turned the same way. It's a very, very significant transformation we've been driving and a really good diversification of both growth engines, profit engines and growth profit -- gross profit levels, which I think from a financial perspective is very solid and sound. And we're so happy to see that how the customers are seeing as well. We can really see large enterprise customers turning to us, looking at as a different light and being wanting to deal with us as a broader supplier and on the more strategic side, but then also ability to drive cross-sales, cross-sell across these different units. So from a management perspective, we're strong focus on gross profit and matching OpEx to EBITDA, #1 focus. And #2 focus, really happy with the position we take in this market, which I think will propel us going forward into this very, very strong market going forward. That said, thank you, leaving it over to you, operator and for questions.

[Operator Instructions] And the first question from the phone line is from the line of Mohammed Moawalla from Goldman Sachs.

I have a few questions if I may. So first of all, I just wanted to unpack kind of the gross profit growth little bit because obviously, there is some pricing pressure, but also from the operators and then historically you've talked about taking several quarters for you to kind of push that through, but how do you, do you think the gross profit will evolve because you talked about the gap between revenue growth and gross profit growth. And from a kind of a quarterly phasing standpoint, how is that expected to kind of evolve in 2021. And then secondly, can you talk a bit about some of the cost measures you mentioned, is this likely to be more back-end loaded in terms of the improvement? And therefore how should we think of EBITDA margins phasing across first and second half of this year? And then lastly, a question really around some of the kind of cash flow elements, I believe some of the acquisitions have had higher CapEx to sales, is that likely to mean the group kind of CapEx to sales is likely to be higher? And how should we think of working capital, so as we think of kind of cash flow, I mean you are sort of close to 3x. What are the risks around potentially breaching covenants? And could you give us some details around those covenants and why you're confident that they may not happen. Thank you.

Thank you, Mo a few, I think that was more than few questions perhaps we'll see if we can cover all of them I think Oscar, you had a question on how we see gross profit evolution going forward. Also a little bit on the characteristics of how we're working with cost control. Then I think for Roshan, we had a discussion on CapEx to sales. And also I think maybe on net debt, so Oscar I'll let you start.

Yes. So gross profit going forward, I mean, we don't give forecast, but I think some things worth considering when you do your analysis of this. And the first one is, remember, the effect of acquisitions, pro forma revenue including acquisitions would have been SEK 23.1 billion and gross profit would have been SEK 7.7 billion. And so look at the company, as the company analyze these business units on a standalone basis that's number one important to understand. And the somewhat weaker organic performance in Q4 related to the message investments which is roughly 40% of the total. And looking at the pro forma gross profit growth backwards was gross profit was 13% in local currencies for the full-year and 8% in without local currencies, but 13% in local currencies, with GP growth a little bit slower at the end of the year. And then you need to consider the special effects in Q4 and we had like isolated onetime effect and time-bound contracts with one mobile carrier having a 5% gross profit impact in this quarter, without that it would have been 10%. And effects of Brazil and India and strong comparisons, they are obviously hard to quantify, without them GP growth would have been a few percentage point higher in Q4. Overall, I mean we obviously -- we have driven very strong gross profit growth organically in the previous quarters and we obviously always work as hard as humanly possible in order to drive that going forward. And we see some very positive sides on the cross sell side, on the position we have in the market. And then we see some toughening competition on specific margins in, get out in the messaging industry, which is obviously tough. On the other hand, with our position, we're in a strong position to utilize our scale in order to play that game in a good way, exactly how that will play out, it's obviously hard to quantify. But given our position, we think we stand strong in this market going forward as well. And on the cost control, it is very concrete, there are 2 areas where we have driven cost going forward -- that would, that kind of stands out here. One is the scale-up OpEx as you can imagine, doubling the business in one quarter, I mean there's just like a set of group functions like finance, like HR, like business IT, et cetera, you just -- we have to have a broader set of team in those areas in order to do take group accounting for the double size of the company with a lot of new companies coming in, I mean that's just bigger than what it was before. So now we have taken investments in order to get over that hump and obviously the work will continue, but we will limit the growth in OpEx in those area because now we kind of taken in the businesses and working on optimizing on that. And that's kind of a more of a specific to this quarter. The other side is more of a investments in sales and marketing, that's more of a mismatch. You grow, okay, this quarter gross profit growth was lower but previously have had higher and then we have mismatched gross profit and OpEx. So what we're doing there is basically saying, okay, now let's not -- let's flatten out recruitment, let's flatten out cost addition in the messaging business in a significant way. And in order to let the GP match the OpEx growth so we can do that over a couple of quarter. So and that's already implemented, we have a specific approval for any hiring within the messaging business right now that goes to Roshan and Anders, who is the -- who is leader of that business unit. So everything role is individually probed by us in order to make much of the OpEx to the GP side. And on the cash flow side, Roshan, maybe you can comment?

Yes, thanks. I'll just add one thing there on the timing, Mo. I think it's a lot of the OpEx, of course, short-term is already signed up, right? So it does take -- it takes a bit of time to see that in the financial numbers. Going on to the cash flow, I think firstly, both Pathwire and MessageMedia are very strong cash flow generators, so as also Inteliquent, but especially Pathwire and MessageMedia are strong cash flow generators because they have a significant size of their revenues coming in also through prepaid kind of subscription. So that helps. The -- from a working capital perspective, I would say that in Q4, we are a bit hampered by some technical treatments of the acquisitions. Otherwise, the working capital development in Q4 would have been even more positive than what we have reported on a like-for-like basis. So as we comment that on the cash flow statement page, yes, Inteliquent, especially among the acquired businesses, has a slightly higher CapEx to sales. But in general, I think we still believe in a strong cash flow generation next year. And I think we have trended somewhere between the 60% to 70% cash flow conversion range and I think that's what we believe also will continue to be the case going forward. And that will help deleverage net debt. Remember that when we announced the acquisitions, we said that we would be at 2.9x and when excluding the IFRS 16 lease liabilities, which we have not factored in at that point in time, we are actually ending the year at 2.9x and we'll see some deleveraging during the year.

And on the covenants, please?

No, I mean we're -- so far, I don't have the specific question there, Mo, but so far, we're in line with our covenants, I mean the financial target that we have set is at 3.5%. As you might have seen, we've announced some new financing today where we've increased the consortium of banks that were -- that are part of the credit financing and also added Svensk -- the Swedish export credit bank to the consortium. And yes, I mean, those -- the covenants are very much in line with our financial targets. And therefore, we are in line with that.

Got it. If I may just maybe one for Oscar, as we think of that GP growth, I mean, should we think of 2022 as a bit of a kind of consolidation here as you bet the deals and...

Sorry, Mo, we need to move on to other questions. And can I ask you, please, to refrain yourself to 1 to 2 questions and we'll look back. So glad to take your question once we cover the rest.

So the next question is from the line of Predrag Savinovic from Carnegie Bank.

The first question is on the extra cost impact and gross profit on volume not sold. Oscar made a good comment on the [Technical difficulty] enrollment, I guess you've done this before in countries where you have more volume, but was this the first time is it in this specific country? Did you expect something that did not occur? And can we put this behind us now? Then I have a follow-up as well.

Roshan?

Do you want me to start off, Oscar?

Please go ahead.

Yes, I mean this is, as we said, I mean, it's a contract with a very large well-known multinational operator on a global basis, covers many countries. We have specifically then seen that in 2 of those countries. We have volumes that do not meet the commitments and the expectations that we have, which then drives up our cost. We have, of course, made a judgment as at the end of the year as to what that additional cost might be and we have made a provision for that. I think, as always, this is an estimation and a judgment and I don't want to make any commitments for Q1 and Q2. But at the end of Q2, that contract will be terminated. And so we will not have that going forward from there.

That's very clear. And on operator price hikes, they seem maybe not global, but broad judging by what you report and other players do. You have scale, right? There's no one bigger than you. It would be interesting if you could reason a bit around the potential benefit of actually not raising prices fully to customers and even grow more because I can see your peers some are raising prices, but you have the scale benefit right? Can you win in this environment, thanks to this, even if it's challenging right now.

I mean you can obviously speculate about that, I mean it's -- it is directly when this happens, it's a little bit of a -- the operating price increases drives a competitive gain between the competitors, right? Now the longer you wait, then you may pick up traffic from competition because you have better prices, right? That's kind of one way to capitalize on these price stage, that's a short-term thing. Typically, we try to keep gross margin. We think we can drive a good service, but of course, you have that type of tactics in the short-term. Then a little bit longer-term, it could be so that you're actually seeing a little bit of a shakeout in the market where smaller competitors will have a tougher time, we talked about that a long time. If you don't have upsell opportunities, if you don't have the scales in this type of business with large economies of scales, it gets even tougher than for us. So you could reason around what's going to happen going forward the larger players are probably going to win in the end when price competition gets tough because they can -- they have a broader base to do it around or to dispel the costs on. So, but you could, it's not a strategy we are playing, but that's the way the market could play out going forward, but that's more on a speculation level than anything else.

The next question is from the line of Stefan Gauffin from BNP.

I would like to continue on this sort of price competition in the market. Historically, you said that when you see these operator price increases, it typically takes a couple of quarters before you have sorted that out. Would you say that the competitive situation has changed or is that another level right now, making it harder for you to adapt to this, I'll start with that one.

Little bit different than different markets, Brazil especially you have 2 effect, you have west, you have Austria for example this, you have the competitive position and you have the macroeconomic climate with very high inflation rates, et cetera. So in those markets, a lot of different moving factors. I think the macroeconomic headwind definitely make it harder to pass price changes on. And obviously, the inflation rate makes puts pressure on your EBITDA in that type of markets. Again, a much, much tougher for only local competition, but you do definitely have that. In India, little bit different, we see a strong market going forward, but definitely strong competition as well there. So yes, I think you have a combination of those factors and how much and hard to say hard to -- how much each factor is contributing is obviously hard to say in this type of -- in a sweeping global statement, if you will. Is the market competition a little bit tougher now than it has been? Yes, it has increased the last 2 quarters, it increased a little bit on the price competitions. Previously, we've seen low single-digit price declines, but more than well outweighed by the volume increases. Now it's been a little bit tougher in the last 2 quarters, that's why we commented on it. Now that may be bad for the market, but it may also be good for the larger players going forward. In general, we think we stand strong in the market. Then...

I think just a couple of maybe complements to that, whether [ Andreas ] some of the points made earlier, I think one is that remember again that please remember that the messaging business in 2022 is around 40% of the total business. I think the other comment to kind of add to this is to say that when adjusting for the provision that we made for the volume commitments, I mean, our organic growth was -- on gross profit growth was at 10% in this quarter despite having quite tough comparables coming into this quarter. I think that's an important indicator as well in what is otherwise a tough quarter, right? And I think, obviously, that's the baseline that we have going out from Q4 '21.

Yes, another question and I mean there are a couple of one-offs this quarter with this provision for volume commitments and also the bad debt provision. The concern I guess from some investors that I've talked with is that perhaps you have been too focused on the M&A process and have not had enough focus on the core business. So how can we be sure what that these kind of issues will not be repeated? And is that comment anywhere valid?

Well, it's a good question. Obviously, when you grow a business this part, I mean we're doing 6% to 9% gross profit growth in this quarter, closing 4 transactions, do we spend time on that? I mean, the answer is going to be yes, right? That's how it is. I think the operating model that we put in place with these 5 business unit -- business units will -- is our view the best way of insulating each business unit against that defocus because then you have a leader for each of these business units, there may be an M&A in one of them, but that doesn't affect the other 4 of them, that's really one of the core reasons to we do that, so that we do that. So be able to drive -- continue to drive strong organic growth and M&A driven growth. We continue on that strategy, right? So that's the reason we do it. Can there be impact? Of course, there can be and as with everything you do, there will be some type of distortion, but that's also I think the answer to what we're doing to rectify that is the business unit structure.

The next question is from the line of Andreas Joelsson from Danske Bank.

You mentioned cross-sell potential several times in the presentation. So just curious because sometimes it feels like cross-selling is easier said than done. So can you please tell us a little bit how you go about to realize those cross-selling opportunities? And secondly, on the OpEx side, I noticed from Mr. Heath's excellent excel sheet that you have increased the number of consultants quite heavy in 2021. How much of those are sort of in preparation for the integration of the acquired units?

Okay. So cross-sell very concrete. I 100% agree with your question and I think the same as you do then looking at it from what we actually do, it's actually very concrete. So what we do right now is to say spec a list of 100 or 200 messaging customers. We ask the account manager of those customers open up the account. We bring in -- if we take the e-mail example just to take an example, take that -- bring in a Pathwire target team to say, these are 100 large enterprise accounts. This e-mail path for our team especially sales team come in and sell -- do what you do when sell to these customers and we just go one-by-one. So that's how concrete it is. And the impact I think is large, I think we have over 20 engagements today where we're kind of in real engagements with large customers of pitching the e-mails with good interest. And we have signed the first customers -- first customer now already going to 1, 1.5 months after the deal. So I think it is -- when you do it that way, it becomes very concrete and then we do it the other way, rather, right? We make a list of the path for our customers to say, let's make 100 customers and let the account manager for them open up and we bring in the Sinch's messaging team basically. So it is actually very concrete, which I'm very happy with. And like I said before, the other thing I'm happy with is, when we open up to -- we've done it enough now and have enough interaction with large enterprise customers on the messaging side to know that almost all of these customers are very impressed by the service that Pathwire team is providing. They all have enterprise like there's a 100% overlap, every single messaging customers have in provider so far and they're very impressed. So the theory we had is I think is proving to be true. Then in order to get that to GP, sign the contract and get the actual volumes ported over. I mean that will take some time and we're obviously not through that yet, but very concrete on what we're doing. And on your second question, finance, Roshan, do you want to take that or should I?

Yes, I can at least start with this, I mean we see it's -- what you see, what you're referring to is the average number of consultants that is in our report, which has grown to more to 550 at the end of Q4 or the average for Q4. I mean that is a reflection of the fast scale up that the company has had to do, right? And very often due to recruitment time lines, I mean, there is definitely a need to go in for interim staffing in many areas. Now a part of the cost control and cost reduction exercises that we will exercise in 2022 will include, of course, addressing this base, right? And -- but again, I think the reason for bringing in this number of consultants has been due to rapid scale up that they come and really addressing all of these issues while recruitment takes a bit of time.

The next question is from the line of Daniel Djurberg from Handelsbanken.

I have 2 question, if I may. The first would be on the messaging side, I'm looking at Page 21 in your report. We can see that messaging in the US has fallen off some 22% year-over-year despite this US appreciation of 10% year-over-year. So my question is, is this related to the multinational mobile operator you mentioned? Or is it that you -- something that's happened with some of the big tech customers? That's the first question.

I think that I mean Daniel...

Roshan?

Yes, I can start off on that one. I mean, Daniel, I think that's, that's -- that is reflecting the country for where the invoicing to the customer is done rather than actually where the customer is based or where the traffic is being terminated. So as we said in previous quarters, I mean, there is sometimes a shift in terms of where the invoicing is being done from. And there can also be large one-off kind of effects that are retrospective in character that affects that mix. So it's not necessarily reflecting the underlying business development, but maybe we can take that -- pick that up offline and give you more details on that.

So you can't state that you still have the fix out of the big tech or if it was 8 of the 10 big tech, I don't remember.

Yes, yes, I mean that we can confirm, we still have 8 of the ten...

That's great. And then one more question if I may and that would be on Pathwire. If you look at the pro forma 2021 profit after tax, it's -- your comment on report -- in the report on Page 29 that you have a loss here on SEK 363 million for Pathwire. Is that the something that is extraordinary there? Or is the run rate when we enter into 2022 and what can you do about it if that's the level. Thank you.

Thank you. I think if you're looking at bottom line there as it's [indiscernible] fully yet. So this reflects previous owners and their financial setup in terms of how they under private ownership extract value from the business. It has no representative value at all for how it will be treated in Sinch.

So that's great. So can you give any ballpark where we could look at the EBITDA or so?

I think in general, I think we've given EBITDA for all the bigger acquisitions in text and in the spreadsheet, right? After than that, generally speaking, we pay our taxes in rate in most countries, right? We pay quite a lot of taxes, especially perhaps for being x, so you should take that into consideration. Other than that, I don't see to my knowledge there is anything in particular.

The next question is from the line of Daniel Thorsson from ABG.

Two quick questions from my side. First one, you say that the new YY access charge reform will materially offset the underlying growth potential in voice and video in '22. Can you help us quantify that? Is material offset taking it closer to 0, slightly positive or slightly negative territory. The second one is, how should we think about future acquisitions? Do you think that you have what it takes product-wise to succeed in the global CPaaS market, given that you are now announcing the new operating model with the business units as the business looks today? Thanks.

Oscar, maybe I can start off on the first one and you can fill in and answer the second question -- the acquisitions for the future. I think just a clarification on the first one. I mean, I think we have indicated a intent when pro forma growth of around 7%. And that 7% is actually indicative of what we would expect for the current periods after including the impact of the 8YY [Technical difficulty] reform. If you were to sort of exclude that impact, the underlying growth would be significantly higher. So I think that's important to remember. Oscar, you want to continue and also especially answer the second...

Yes, so on that one, you're right. We think we have achieved an extremely good position in this very strong market with the accessions we have made, that's one. Then we still have an organic and an inorganic growth agenda, especially in the long-term. And because we think there are continued opportunities obviously grow a strong organic growth and for M&A driven growth going forward. Then the timing of those, obviously, from a -- when we do acquisitions is we need to think about now, now we have done a lot of them. We need to focus as you have mentioned on this call, a lot on operations, making things work in between these units as of today. So that's going to be a very large focus going forward. And we need to take our main teams to focus on that. That's one. And on the other hand, it's a -- and then you have just pure financials of making acquisitions, we always do accretive acquisition, so that's another part of it, of course. Then do we see opportunities for more acquisitions going forward in this very dynamic market in the mid to long-term? Yes, we do think there are strong opportunities to add other areas. Do we need to maybe less of a needed to right now, but I think there are strong opportunities that will drive strong shareholder value going forward on both the organic and the inorganic growth side.

The next question is from the line of Andreas Markou from Berenberg.

So two questions. The first one is a bit of a follow-up on Inteliquent. My question is more on cross-selling here and the revenue synergies you can have between basically selling Inteliquent offering to your messaging and other clients and vice versa. I mean, you mentioned about e-mail that you've identified quite a few clients that you can cross-sell the e-mail solutions to them. Have you done something similar with Inteliquent and shouldn't that actually make up for part of the lost growth coming from the regulation? So that's the first one. And the second one is if you can give us a bit of update on SMB integration. Should we expect that this should be complete by, let's say, Q4 in '22?

So on the inter, yes, Pathwire was just an example, sorry if I was unclear. We see similar things on Inteliquent and similar things on the application side. On the SMB side, it's on the small businesses, it is -- you do also see it, but you need to do a product integration in order to reach it because it's not a individual contract for a customer, it's just like them buying on the web, but 100% you see them in Inteliquent and application side as well. We have seen the traction a little bit slower, but definitely you see the traction in those 2 areas. On the SDI integration, we have previously said it takes in between 18 months to 24 months to integrate these type of companies when you talk to the platform migrations. So your time line is roughly correct relating to those time lines, yes. In terms of people integration, the majority of that is done, I mean the sales teams are mixed. You cannot see who was in SDI and who was in Sinch before. So a lot of the people side is already done, but then migrating the traffic and closing down platform is round about the time lines you stated, yes.

Okay. Great. Maybe just quickly on Inteliquent cross-selling. So you mentioned little bit slower, but is this included in the 7% guidance you gave us? Or is basically cross-selling on top of the 7%?

First, I'm not sure we give a guidance, but gave you the historic growth, right? And just to be clear on what we actually said. So I mean the historic growth, it is obviously not included because then we weren't closed, if you will -- and guidance, we -- yes, guidance we don't give, but we will work as hard as we humanly possibly can in order to drive growth in all our business units.

Okay. Thank you very much.

But in that number, as a fact, no, there is 0 cross-sell, if you will now.

The next question is from the line of Freddie Lithell from Handelsbanken.

Just a quick final one maybe for you guys. Regulation, you talked about the 1800 regulation in the US. There are other regulations ongoing, we saw the 10 deals in the beginning of '21 and we have seen sort of the star and shake and I think it's called in the US on robocalls and all that stuff. Can you see effects from that? Or that you're cleaning out that type of not needed traffic sort of -- any more regulations that we should be aware of?

Yes, I think with the risk of lacking perfect information to take it for what it is, the one -- the major one that we know and that will impact our business is 8YY reform, right? And that will be offset then, of course, by underlying growth as Roshan alluded to. There aren't any other material aspects which we think are important enough to highlight at this stage. When it comes to robocall as forsaken, Inteliquent a recognized leader in that field, so not seeing that necessarily as something negative.

There are no further questions on the phone line, so I'll hand over to the speakers to check for questions on the web.

Thank you. I think we had a few questions on the webcast. They are quite detailed in nature. So if we can ask you to just reach out to Investor Relations at [email protected] and we'll do our best to pick them up. With that -- given that we're about 15 minutes over time, thank you for all the interest and the engagement and the questions. We're here to help, so reach out if there are any other follow-ups. I think with that, Oscar, if you want to have a brief concluding remarks before we end the call?

No. Thanks a lot for your interest. I mean, there are 2 big focus areas, organic focus on driving growth in all these aspect, strong management focus on that and then focusing on matching OpEx to EBITDA and having cost control and making sure we got our EBITDA follows our OpEx, really strong focus on that. And then on the total side, being very, very happy with the position we've taken really transforming this company. I think we're in a very strong position in an overall very strong and growing market. So strategically, we're super happy with the story and then we need to get our hands down into the quarterly performance and driving that forward. That said, thanks a lot for all your interest and take care.

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.