2023-04-30 16:19:02 ET
Sinch AB (publ) (CLCMF)
Q1 2023 Earnings Conference Call
April 27, 2023 8:00 AM ET
Company Participants
Thomas Heath - Chief Strategy Officer and Head of Investor Relations
Laurinda Pang - Chief Executive Officer
Roshan Saldanha - Chief Financial Officer
Conference Call Participants
Akhil Dattani - JPMorgan
Andreas Joelsson - Danske Bank
Predrag Savinovic - Carnegie Investment Bank
Stefan Gauffin - DNB
Daniel Djurberg - Handelsbanken
Daniel Thorsson - ABG Sundal Collier
James Pavey - Bank of America
Laura Metayer - Morgan Stanley
Mohammed Moawalla - Goldman Sachs
Presentation
Thomas Heath
Thank you very much, operator. And good afternoon, everyone. Welcome to this earnings call where we present the Q1 2023 results for Sinch Ab.
My name is Thomas Heath. I'm Chief strategy Officer and Head of investor Relations. With me today, I'm very pleased to say is our CEO, Laurinda Pang, alongside our CFO, Roshan Saldanha. And with these opening remarks I’ll ask the operator to move ahead to slide 3 for some opening remarks from Laurinda. Laurinda?
Laurinda Pang
Thank you, Thomas. Good afternoon, everyone. It's such a pleasure to be with you today. And as I’ve been in the role for just under two weeks, Roshan will cover the detail around the results for the quarter and during the Q&A session, he and Thomas will answer most of your questions.
But with that said, I thought it was important to share some of our thoughts this morning and to properly introduce myself.
You might be wondering why I'm excited to join Sinch. And there are three areas that I evaluated to answer that very question for myself, the industry, the company and the world. How to see an industry. I spent most of my career working with enterprises around the world and what I know to be true is that for them to compete and win in their respective markets.
They must digitally transform. And I know that's an overused phrase, but the reality is that today's consumers are extremely demanding. You and I as consumers have huge expectations. We expect speed and ease. Consumers are not lowering demands rather they will continue to expand and accelerate. So for enterprises to compete and win, companies must make their products and experiences easy and fast for us to consume.
Cloud companies who enable omni-channel communications are more than simply relevant in this equation. They will continue to play an important role in the ecosystem of enabling enterprises to meet their business objectives around growth and efficiency. In fact, we can all see the analyst reports who say that some segments will grow impressively in coming years.
Of course, given the variations of products within CPAP, some segments will grow faster than others and we all know we are facing challenging macroeconomic environments.
Next, I looked at the company itself. We talk about Sinch as a CPAP player and as a communication cloud for customers. We fit both of those labels. But I also see Sinch as a customer experience company, who is well suited to address the needs of the market as I described just a moment ago. Sinch makes it easy for enterprises to maximize opportunities across every phase of their customers’ journey.
The strategic investments and acquisitions we have made, particularly in the past two years are both compelling and comprehensive. This is the company that has been profitable since day one, has a set of Founders who are visionary, yet humble, a Board who is engaged and committed, and over 4,000 colleagues around the world to operate with a core set of values around, trust, respect and collaboration.
This collection of talent, culture and technology portfolio is our competitive advantage. These are the right ingredients for reaching our potential for both organic growth and continued consolidation.
Finally, the role of folks, the question I ask myself here is do I fit and can I have a meaningful impact to help Sinch reach its ambitions. I’ve answered yes to both of those questions. And here's what you should really know about me. I'm customer first. I'm employee-oriented. I've been leading transformations across large sales organizations for many years.
I've led commercial and operations teams around the globe. I'm demanding about operational excellence because I believe in the power of operational discipline delivering efficiencies and more importantly, it enables exceptional experiences for our customers. So, in summary, my background has prepared me well for the honor of leading Sinch today.
Operator could you please move up to the slide 4? I'm not prepared to unveil a new strategy or commit to new deliverables at this time. And in fact, it's really important to know that our strategy and key commitments remain intact, meaning that we continue to focus on cost control, cash flow and organic growth.
However, I am happy to share some of my initial thoughts on how we progress in these important areas and where our opportunities are to create value. So, for today, I highlight two. Integration is highly complex and cannot be considered a monolith. When describing integration programs, I often talk about the need to solve a Rubik's Cube.
We need to solve across infrastructure and core IT system, product platforms, mastering data, harmonizing processes, account assignments, incentive systems, and the list goes on. And by the way, we also need to execute against all of these so well that we ensure our customers are not impacted negatively. These are not easy and that they do require strong, planning and governance.
We have an opportunity to improve our integration execution. Go-to-market strategy is another area that requires more attention and better execution. Starting with customer segmentation, who are we targeting and with what products and solutions and how are we going to settle and support these customers. Just as integration cannot be considered a monolith, nor can the enterprise customer segmentation.
There are specific personas within enterprises that we need to design our selling notions towards including developers, marketers, operational and business leaders. And as such, our Sinch platform is integral in our go-to-market strategy, in addition to traditional selling and customer success motions.
Integration and go-to-market or top of mind for me and the rest of the team. And we're urgently assessing our plans here along with other value creation opportunities and I look forward to sharing a more comprehensive plan with you in the future.
Until then, thank you for joining us today. And for giving me this opportunity to speak with you. I'll hand it over to Roshan now.
Roshan Saldanha
Good afternoon everyone, and thank you, Laurinda and welcome again to your first earnings call at Sinch. Let me begin by summarizing the first quarter, if we move to Slide 5. We identified three priorities in Q2 2022 which are cost control, cash flow and growth, and we are executing accordingly. We’re pleased to see that cost development is in control and in line with actions taken.
Adjusted OpEx has reduced by 4% in constant currencies, excluding one-offs in the quarter versus the second quarter of 2022 when we started the cost reduction program. If we look at the Sinch parameter prior to the 2021 acquisitions, adjusted OpEx is reduced by 60% over the same period.
Net sales grew 6%, gross profit by 8% and adjusted EBITDA by 10% year-on-year. We have a diversified business and several segments grow well, while others experienced challenging market conditions.
However, on the overall basis, margins are slightly increasing with gross margin going up one percentage point to 33% in the quarter, when compared to last year. We've also taken the next steps in integration and implemented organizational changes and launched the combined leadership for messaging and email to accelerate product integration and unlock cross sales potential across regions and customer groups.
I'd like to remind everyone that this is a clean quarter. No Acquisitions during the last 12 months. And hence, we have the same parameter in Q1 ‘23 as of Q1 2022. Our leverage ratio, which is net debt-to -adjusted EBITDA excluding impact from IFRS 16 leases remains stable at 2.7x.
We're also excited about bringing to market an application suite to enable enterprises to deploy conversation messaging within marketing and customer care. This is a true integration success building on functionalities from messenger people and chat layer, as well as leveraging Sinch’s conversational API.
Moving on to the next page, when we look at Q1, we can conclude that we continue to see positive effects from the cost reduction program we launched in Q2 last year. The chart shows how adjusted OpEx has developed. Adjusted OpEx is defined as the difference between gross profit and adjusted EBITDA. The yellow parts show OpEx added from acquisitions in late 2021, whereas the green part shows the organic developments where you see a flattening out of the sharp increase from early ‘21 to early ’22.
Total adjusted OpEx in Swedish kroner is 1% lower in Q1 ’23, compared to Q2 ‘22. In constant currencies excluding one-off items this is 4% lower. A cost reduction program launched in the second quarter target's primarily the green area on the chart, which is the cost base before the acquisitions at the end of ’21.
Looking at this cost base at adjusted OpEx is down 6% in local currencies since we launched this program. Again, looking at Q1 ‘23 verses versus Q4, 2022, sequentially, costs are lower. This is true also for the green part of the chart, when you add back the 60 million Swedish kroner of one-time items that we called out in Q4 2022.
We've also called out a resolved provision related to legal fees in voice, which benefit OpEx with around SEK35 million in the first quarter financially.
Let's move on to the next page. Page 7 shows a bridge explaining our underlying gross profit development. In Q1 ’23, we had organic gross profit growth of minus 1% across the entire business. Excluding the impact from a previously communicated price change to one of Sinch’s largest customers, organic gross profit growth would have been positive.
Since there have been no acquisitions during the last 12 months, we don't need to look at pro forma developments. Gross margins were up about 33%, up compared to 32% in the comparison quarter last year. The Swedish kroner weakening against major currencies have helped gross profit by SEK189 million or 9%. When speaking to the individual segments for messaging, organic growth in gross profit was minus 8 %.
Again, excluding the impact from the previously communicated price change, organic non profit growth would have been at plus 3%. Messaging and volumes were up 2% year-on-year, which have been affected by the economic downturn, lower volumes of traffic from large senders who have been sending at low margins and reduced domestic traffic in Brazil where we can we continue to lose share.
Turning to voice, organic GP growth in the voice segment was as minus 2%. This includes a negative effect from the 812Y regulation change in the US, which is 4% without which we would have been positive at plus 2 % organic GP growth. And the number of application business continues to be a strong contributor to growth in the voice segment.
In email, organic GP growth in the email segment was 23% driven by new customer acquisition, volume growth and improved gross margin from moving to a different cloud service provider. Within SMB, organic GP growth in the SMB segment overall was 2%. However we see that we had extremely strong growth in the US markets and in the online self-served businesses which is offset by slower growth among larger customers, larger enterprise customers in Australia.
Turning to Page 8, this slide shows pro forma figures for Q3 and Q4 2021 to ensure compatibility and shows the gross margin and adjusted EBITDA margin developments over these quarters. Gross margin stability shows the strength in our product proposition towards customers. We believe, we can improve this over time as the higher margin products are growing faster.
In Q2 ’22, as you know, gross margin and gross profit was affected by a reassessment of reserves for accrued traffic posts by SEK162 million, which affected both gross margin, and adjusted EBITDA margin. Again, stable gross margin over a longer period of time is what we see on this page and there is of course, some difference in seasonality between effecting gross profit and OpEx, as well.
Moving on to Slide 9, which shows our income statements, worth calling out here is that we have currency effects, affecting revenues, gross profit and EBITDA. When we compare reported and adjusted values, the largest adjustment items between EBITDA and adjusted EBITDA is Integration spend at SEK47 million. This relates mainly to integration of platforms in our Messaging segments from previous acquisitions and in our SMB segment the migration of simple texting on to the message media platform.
We also have some operational foreign exchange rate losses and small burnouts payments related to tax items in Brazil from the acquisition of EWW. Depreciation and amortization of SEK 605 million for the quarter includes non-cash amortization related to acquired assets of - and that non-cash amortization is SEK 496 million.
Adjusted EBIT grew to SEK725 million, excluding EBITDA adjustments and the amortization of acquisition-related assets. Net financial expenses were SEK162 million in the quarter with interest costs amounting to SEK 133 million, which gives us an effective interest rate of close to 5%.
The Group's effective tax rate in the quarter was 3%, which is lowered by recognition of deferred tax assets and re-measured before tax balances due to studio changed tax rates.
Please turn to Page 10, a clear focus for forcing Sinch, I mean, one of our top three priorities has been cash flow and within that that’s been reducing our overdue accounts receivables. This graph shows days sales outstanding and includes all of our accounts receivables, both billed and unbilled, as well as accrued income and is - and also includes pro forma net income.
DSO was down in the quarter at 56 and which is down from six days in the fourth quarter and this has been possible due to continued focus on recovering outstanding customer receivables.
Moving on to Slide 11, where you will find a bridge from adjusted EBITDA to cash flow before changes in working capital and exchange effect between these items. As in previous quarter, we calculate cash conversion after CapEx tax payments and interest payments. Normally, over a longer period of time, we believe this business should be in the 40% to 50% range. Last year, we had a release of working capital, which helps cash conversion.
On a rolling 12 months basis, we have as at the end of Q1 ’23, a cash conversion of 60%. However in the quarter cash conversion was at 7% caused by decreased accounts payable and higher paid interest. Also paid taxes tend to be seasonally higher in Q1. Please note that working capital can be a bit lumpy as we have large, enterprise customers, a payment from one of our larger customers and on the right side of the core channel can effect this KPI significantly.
Please turn to the full cash flow statement on Page 12. Note that we paid down debt by over SEK 300 million during this quarter. Cash flow from operating activities for the quarter was SEK212 million. We have a strong financial profile with a diversified earnings pool and also net working capital, as a percentage of sales continues be low, which shows the asset-light nature of the business.
The Group had a closing cash balance of SEK 1.9 billion as at year end. In addition we have available bank overdraft facilities of SEK911 million.
Please turn to Page 13, where you see net debt over adjusted EBITDA, our leverage measure. Three components affect net debt over adjusted EBITDA growth, cash generation, and also the immediate currency impact on debt with the trailing impact on earnings.
In the quarter, we are happy to see the flat development of net-debt-to-adjusted EBITDA. We expect to continue deleveraging this during 2023 and from both from earnings growth and cash generation.
Turning to Page 14, we reiterate our financial - our unchanged financial targets to grow adjusted EBITDA per share with 20% per year and to keep net debt over adjusted EBITDA below 3.5x over time. Adjusted EBITDA per share grew 55% in Q1 2023 measured on a rolling 12 month basis.
And net debt to adjusted EBITDA is at 2.7x, which is well within our financial goals and a reduction from 3.2x as at the end of the third quarter 2022. For the last 12 months, there is no difference between pro forma and reported EBITDA, but the KPI excludes the impact of IFRS16-related leases on both net debt and adjusted EBITDA.
Turning to Page 15, I'd like to reiterate the priorities that we set out in the second quarter of 2022. We continue to work with cost control, cash flow and growth. Looking at our entire business, we have healthy business with stable and slightly growing margins and a very diversified earnings pool. There's still potential to extract further cost and revenue synergies from the acquisitions closed in late 2021.
With this summary, I would like to hand over to the Laurinda to highlight some of our recent announcements about our partnerships with the world's largest global tech companies.
Please - operator, please move to Page 16.
Laurinda Pang
Thanks very much, Roshan. The partnerships and ecosystems are important ingredient to any go-to-market motion and that is true for Sinch here. We are uniquely placed to serve large global cloud platforms, who wants to make customer communications a part of their offerings. A few reasons why that's true. Our customer communications cloud covers all the most relevant communications channels that business use to communicate with their customers.
We handled hundreds of billion interactions across messaging, voice and emails. We support both established technology like SMS messaging, and emerging channels, like WhatsApp and Apple Business Messages. We operate largest independent voice network in North America, and we control our value chain with direct connections to hundreds of mobile operators, which improves our delivery rate, shortened latency and ensures data remain private.
So during Q1, we've announced important partnerships with Salesforce, Adobe and Microsoft. Let me talk through a few of these - actually through all of them and explain why. Because it was Salesforce, we ensure that businesses can communicate with their customers throughout the world using SMS and new messaging channel.
We've worked with Salesforce since 2014 with product teams and active engagement to align roadmaps and deliver new functionality. We also have a strong relationship with Adobe and we recently were awarded Adobe Digital Experience Technology Partner of the Year Award for Customer Journeys.
With Adobe, we have built out some very innovative functionality for conversational messaging where they leverage our capabilities across multiple communications channel. Here, we also have a new partnership model where Adobe resold our products, which is a step up from our previous engagement with them.
Turning to Microsoft, we enable businesses to use our Microsoft Teams, product to call and receive phone calls through the regular PSTN voice network. Here we make two announcements. One about enhancements to our products that make it easier for third-party system integrators to help set up and configure voice calls and teams; a second related announcement called out our cooperation which one such partner for a professional and managed services.
Moreover, we also work with Microsoft in two different use cases, leveraging other products in voice. Of course, there are many more customers and partners beyond those we showcase on this slide. Engaging with customers is one of my top priorities and now I've had the opportunity to have several calls this week with customers.
As an example I had a great conversation with a leading European martech company just yesterday who uses us for SMS and now looks to Sinch both for emails. Based on around 700 million SMS messages per year on behalf of their customers, and we are one of two suppliers to them, but they also send more than 10 billion email messages, a service they are currently buying from a competitor.
And as we now have capabilities across both messaging and email, we see opportunity to significantly we increase the scope of that particular engagement and relationship with that customer. I would say that each of the conversations that I've had with customers this week have reinforced the thesis around Sinch building and acquiring or through acquisition, building a portfolio of services across all communication channels. The customers see the value proposition. They are excited about the portfolio of services.
And I am really looking forward to helping to take Sinch to the next level by leveraging that entire portfolio on behalf of our customers.
So with that, I'll turn it over to - or operator, I'll ask you to start us into the formal Q&A session.
Question-And-Answer Session
Operator
[Operator Instructions]
First question comes from the line of Akhil Dattani from JPMorgan. Please go ahead.
Akhil Dattani
Hi, good afternoon. Thanks for taking the question. Could I start just really asking about the trends we're seeing in the moment and just maybe how we should try and think about them? So, there is two parts to the question. One is you've now reported two quarters of negative trends. I'm trying to understand how we should think about them and it's clear that there's a macro element to this and the economic environment is unhelpful.
But if we look at your peers, they still seem to reporting double-digit growth rate. So I just trying to understand, what do you think the difference here is? You think it's those operate to the just behind the curve and they'll ultimately see the same trend as you? Or do you think you are underperforming – if you think of underperforming, why do you think that is?
And then, the second part of the question is really about how we think about that the look-forward. Obviously, we know that comp should get easier over the next couple of quarters due to various items you've been highlighting over the last 12 months. I wanted you could remind us of how big those comp items are. And I guess, ultimately, what I'm trying to understand is, do you think that sufficient for trends now to stabilize and accelerate? Or does the macro make it too difficult to call? Thanks a lot.
Laurinda Pang
Akhil, this is Laurinda and I'll kick-off, but then I'll turn it over to Roshan to finish out. With regards to the past two quarters, I would say, in Q4, we did talk about the headwinds from a macro standpoint. But in Q1, I wouldn't say that anything has worsened necessarily, but certainly we have a full quarter impact of those headwinds. So I think that's what you're seeing you know, different sequentially, if you will. But I think what's really important to note is that demand is still very much there. And we see that in the form of new customer acquisitions and you will have seen in our report today that email specifically, GP has grown by 23% on the messaging side, even though we have a large base on the messaging side, which has been impacted.
With regards to macro, would you will see new customer acquisition in that part of the business. Our SMB business in the US very specifically continues to grow very nicely. So I think that we have a bit of a Tale of Two Cities, if you will. First is, the larger base that is being impacted by the macro. But we have the other parts of the business that are poised for substantial growth, go forward.
Roshan Saldanha
Yeah, thank you. Thank you, Laurinda. I think that was great. I mean, if I, if I were to expand a little bit first on those I think, as Laurinda said, I mean - we have, we do have parts of the business that grow when I pointed to email I think it look at online self-served business within SMB. We have a similar trend. I also think, gross margins are stable to increasing, which is - which is a positive sign.
Where we see the impact is primarily within transaction volumes from some larger enterprise customers in messaging and both in messaging segments and to the extent we have large messaging customers in SMB where we’ve seen kind of volume traction.
I think that is commenting on the comparison, you made competition or industry, I mean, in our industry you have you have several different companies that differ from each other in terms of be offering. What we can see in terms of looking at the market in general is that, whatever growth rate trade that the company has had going back two, three quarters, they have definitely decelerated from the level – the levels have been different.
And our understanding is that that we we’re not losing market share rather we see in terms of signing new accounts and growing with existing customers by adding new products. We have continued strong developments. We signed 37 new customers within messaging which are large enterprise accounts the last quarter and that's been fairly stable, or there is a bit of seasonal effect, of course, but that be very similar to last four, quarters in every part of the company.
Akhil Dattani
And then there may be, just to close off, I mean, if you - as I said in my remarks there, if you exclude the price negotiation impact, we would have had positive growth overall in Q1 and in messaging, we would have had, growth - organic gross profit growth of plus 3%. So that, I think you can calculate the impact from that KPI.
Roshan Saldanha
We – to look forward, we're not providing guidance. There's a number of puts and takes. Obviously, as you correctly identified, we have a couple of - we have both the price negotiation and the one-off reassessment of CapEx costs working in our favor in Q2. But it's difficult to call kind of how exactly Q2 will turn up at this point in time.
Akhil Dattani
Okay. Thank you.
Operator
Thank you. Our next question comes from the line of Andreas Joelsson from Danske Bank. Please go ahead.
Andreas Joelsson
Hello, everyone. So many questions. So little time. I limit myself to a couple. On prices, if we continue there, you said that it's a little bit tougher towards the larger customers while there are opportunities among the smaller ones. Can you elaborate a little bit of how large these price increases are that you implement and if there are any new renegotiations coming up towards any of the larger ones?
And secondly, maybe for Laurinda, you mentioned integration execution opportunities. Where do you see those opportunities? So, what have you sort of what are your learnings from these couple of weeks when it comes to the integration what’s interesting doing so far? Thanks.
Laurinda Pang
Yeah. Why don’t I start with the integration and then I’ll hand it over to Roshan on pricing and renegotiation. On the integration side, there is a lots of ways to tie an integration and so many companies, not only over the past two years, but over really last 15 or some years and so the group has done a really excellent job with regards to some of the product integration and from migration work. But integration is complexity it’s much broader than just products alone.
And by that I mean, it spans across everything from infrastructure, core IT systems, people, culture, sales force integration relative to customer account management incentive systems et cetera. So, it really is, it's quite complex and that takes some time. So, I would say that the platform migration has been underway and we’ve seen some success there and we know it takes some time.
And so we expect that to continue, but we need, - we've not reached our full potential or taken advantage of the acquisitions themselves as it relates to the growth opportunities and leveraging the product portfolio across all of the customers that we serve.
So those are some of my initial observations Andreas, and we will be putting together some very structured plans and targets to achieve those growth opportunities.
Roshan Saldanha
And maybe I can, take your second, - your first question, second, Andreas. I think when we look at the price negotiation that we have with - which affected our messaging growth starting from Q3 2022, we said that this is a customer that's been with us for many years and, we have grown with this customer. And therefore we had pricing and margins that were a little bit not relevant to the volumes that they that used us for data bring now, right.
Now, when we look to our portfolio and this is something we've commented earlier, we don't see any other large customers that have that situation. I think the other thing is that, the macro impact has meant that, many of the large customers have been looking closely at their larger suppliers and evaluating what opportunities there are to reduce prices. And if there were to be any such discussions, I would have supposed that they have already happened. And there's nothing that is - has had a material impact on us.
That being said, I mean, of course, individual price discussions will happen from time to time. But when you look at margins over the entire period that we have been reporting now, seven quarters on a pro forma basis I mean, they continue to be stable. And they also continue to be stable within the individual segments. So I think that's another indication of pricing stability.
Now, on the price increase that we did, that was specifically in messaging. It was late in Q1. So, if the full impact is not in Q1 it's going to be more in Q2. We haven't disclosed a specific percentage, but remember that even a smaller percentage on top-line results in a 5x impact on gross profit, because of our gross margin percentage being 20% in messaging segment.
And I think the other comment is that, this is obviously not in our entire base. I mean this price increase was not done on very larger customers, but rather on the next level of customers within messaging.
Andreas Joelsson
Very clear. Thanks a lot. I appreciate it.
Laurinda Pang
Thank you.
Operator
Thank you. Our next question comes from the line of Predrag Savinovic from Carnegie. Please go ahead
Predrag Savinovic
Thank you, operator. Thank you for taking my questions. My first one is to Laurinda. And thank you for your intro you did, as well. And I know it's just clear you spent quite a limited time with the business so far.
But I'm still cheers if you are doing your time now, or your own diligence of Sinch have saw certain improvements. You can do any sales process, is there anything you can add on acquisitions, organizational structures or something of that kind? And anything running similar things as your previous employers?
Laurinda Pang
Thanks for the question, Predrag. It's - to your point, it's been just a few weeks. So almost two weeks at this point. And that organization as a whole has gone through a tremendous amount of change, including the sales organization. There's an opportunity to leverage ERM differently. There's opportunity to leverage account planning collectively.
There's opportunity to think about customer segmentation consistently across all areas of the business. With that, there is opportunity to leverage our digital channels, as well more effectively by ensuring that our product portfolio and pricing capabilities are loaded in those digital tools, so that customers can self-service. So there's a number of opportunities across the go-to-market that I see as, low hanging fruit to improve and become more effective.
But I would also note that, it's low hanging fruit to suggest and make the changes. And then there's some time where that has to soak in but new disciplines have to soak into the organization. And, the opportunity to have different types of conversations more comprehensive conversations with our customers. It takes a little bit of time for the sales cycle to work its way through and for revenue to ramp against that.
That being said, again, the digital channel piece, that should be quicker time to value. So, that a lot, there's definitely plenty of work for us to do and to execute differently.
Predrag Savinovic
Okay. Thank you. And could you double click a bit on the customer wins you've done, You mentioned 50 in Q4 on 40 now in messaging, and this is typically than the segment that serves quite large businesses but without knowing anything of their size this number doesn't give us that much at this stage. But what whether you, Roshan or Laurinda what do you expect from these wins? What should we expect here?
Roshan Saldanha
Yeah, I mean, I think Predrag, Roshan here, I think just a couple of comments, maybe to give a little bit more color on what we disclose is, of course, the number of customers. The way we classify an enterprise customer is, when they are above a certain threshold and that threshold, very specific or geography, but overall, it's around US$3,000 in monthly gross profit.
So at least that we have a potential to reach US$3000 in monthly gross profit at that customer right. And there is - then that's a lower threshold. Of course, that amicably very high I think we have individual customers, but usually there is run off time, as well.
Now, what we’ve seen historically is that our business performance within messaging is more depending on the base rather than on recent new ads for recent churn and which is a little bit, also speaking to the stickiness of customers, of products in our business. So because of the ramp up have associated with enterprise customers, they've been around a while before they make a material contribution.
Predrag Savinovic
Okay. That makes sense. Thank you.
Operator
Thank you. Our next question comes from the line of Stefan Gauffin from DNB. Please go ahead.
Stefan Gauffin
Yes, if I could start with the continued question on the pricing in messaging. So it's a mix effect, price increases towards small customers and they have clarified that that came in quite a bit late in the quarter, so we should be full effect in Q2. But that was against also price pressure within the large enterprise space. And can you comment if people have seen the full impact there or if you're still seeing continued price pressure from large enterprises? So should we should we expect an improvement overall stop. I’ll stop on that question.
Thomas Heath
Thank you, Stefan. Thomas here. I try to give a little bit more color. The macroeconomic environment had an impact on our operating metrics at the end of Q4 and what we're saying in Q1 is that, it's not necessarily worse, right? So, all, just from that angle, the impact, the numbers in Q1 a bit more than in Q4.
Now, having said that, Q1 performance quite similar overall to secure for and one of the things that positively contribute right, if macro is contributing a bit more on the negative side, one of the parts that is contributing positively is the price adjustments that we made later during Q1 towards a set of our messaging customers.
So you're correct that the full runrate impact of that's not seen in Q1. But we will see that in future quarters. When it comes to larger customers, of course we called out one particular customer back in Q2, we've had some other such conversations both in the messaging and the voice segment, which we talked about during the autumn.
This is what we see again and now we seen that realized in Q1, rather than indicative in H2. So, not necessarily seeing further deterioration, but with that said, of course we don't really want to speculate on on macroeconomics. But from what we know today, we feel we have those negatives on the full runrate impact right now, at least.
So hard to speculate on the future. Some things we know will improve and of course that alone should he ease or should improve in future quarters.
Stefan Gauffin
Yes. Thanks. And then, two very quick questions if I may. So you are charging quite large integration costs each quarter. When are we seeing an – through the integration processes for these charges? And then, secondly, the gross margin in the voice business is down to two percentage points quarter-on-quarter. Is this just pressure in the more high emergency of business or other explanations?
Roshan Saldanha
Yeah, so I think, I mean, on integration, I mean, what we are charging to integration today primarily over in the SEK47 million in the quarter is the migration of the SDI platform and the LATAM the two platforms in LATAM in the acquisitions that we do there to our simple messaging platform. And the migration of the simple texting, platform grade message media centralized SMB platform.
So, those are the platform migrations that are ongoing. We do believe that within the next 12 months or so, we should be rounding off the majority of these platform migrations. And most of the other costs of integration, we actually take, as, normal OpEx, including investments in new ERP platform.
Now coming to your - coming to your second question on voice margin, that is primarily a result of – as we see kind of A12Y impact, as well as the renegotiation with customers that, Thomas mentioned, you know, that as well as a mix effect. So it's really - it's several different things, kind of playing into that in voice.
We have, we have some products that have any traditionally higher margin that are not growing as fast and then we have the enterprise business within voice, that is comparatively low margin, but growing much faster. So you kind of get a mix impact of that affecting the voice margin.
Stefan Gauffin
Okay thank you.
Operator
Thank you. Our next question comes from the line of Daniel Djurberg from Handelsbanken. Please go ahead.
Daniel Djurberg
Thank you, operator and hi there Laurinda. Welcome aboard and hi, Thomas and Roshan. Two questions if I may here? Starting off perhaps going back to North American messaging revenues full of some 18% percent, despite hefty tailwind from currency. And we know obviously this is coming from price negotiation with large big tech customers of course.
But can it can you give some more color on the volume impact in North America and also if this price negotiations has spread to all those big techs, given this large drop year-over-year.
Roshan Saldanha
Thank you, Daniel. I think one of the reasons we call out this, this price negotiation or this change from Q2, is the financial impact, but it’s also calling it out because it is quite unique.
This is, that’s a large local tech company. So we work with them for several years. But we are tryly seeing some outsized growth at comparatively healthy margins and advantage to me as the priorities shift, also with our customers they will look to improve and change and focus a bit more on profitability. That's the sort of underlying reason.
The background is quiet. It is only particular customer. So it shouldn't necessarily extrapolate to others in terms of where we see discussion on price is contains mainly to larger customers and those discussions are happening during autumn would leave it to the full effect during Q1.
In terms of volumes, it’s again specific to this particular customer, which how he checked up and how he cooperates. we're not really sure exactly where that ends up. I really know we will have 12 months with the past to make the price adjustments when we enter Q2. But we’ve also seen some volume decline annualizing pause to that change. But you shouldn't really extrapolate this to any other customer at least , we don’t.
Daniel Djurberg
Is it possible to give any color on the underlying volume on the rest of the customization in North America?
Roshan Saldanha
But, I mean, I think again, I am not - what we can see is that, there is spend among enterprises to kind of evaluate their cost base. And kind of optimize right and that means that it is also interesting kind of we do see some customers moving to our e-mail products or using our email products more. They are looking for alternatives.
They are also looking at ways to kind of reduce touch points since inception that has come with the cost. So, there's a number of kind of giveaways that they are using to optimize, their cost base. However, underlying that it is the strong digitalization and we continue to sign new customers and we launch new used cases. But in the short term, there is a growing impact right as they kind of attract their customers.
Daniel Djurberg
Okay. Fair enough and if I may, a question on the price increases you mentioned, again Stefan asked the question I think quite late in Q1. Would it be possible to give what approach and the comment on the impact which would have been if this cost impact or cost beforehand I think we have happened January 1 instead of late in the quarter on the gross profit growth in the quarter for messaging?
Roshan Saldanha
I think where we were unwilling to give any more to those numbers on that. But I think other than to say that you're seeing a full quarter impact of macroeconomics, which was a partial impact as you saw or and one [Indiscernible] offsetting this is changes I think that’s where we are still needing…
Laurinda Pang
I think also, Daniel if I may, I would just add, pricing is a lever and we have to be very sensitive to what the market will bear. And so, we will take appropriate actions whenever we see the opportunity when we do or if our costs increase for whatever reason. So, again, it's a lever, but as we think about growth in this business, we will be focused in on the opportunities to cross sell and up sell our existing customers and to take market share.
So, I understand the reason why you want to understand the impact of pricing, but just understand, it's almost going to become part of business as usual. But growth really needs to come through those other areas.
Daniel Djurberg
Perfect. Another super quick, follow-up just interruption on the finance cost and the interest cost outlook for the full year. Should it extrapolate on the – what you saw in the quarter given that your long financing there up until 2026 or can you give any color on the interest costs?
Roshan Saldanha
Yeah, I mean, you have an effective interest rate of 5%. I mean, that’s of course have on those prices and of the competitor space. I mean, I don’t have the crystal ball for how the current benchmark or issues will end up. I think you could look at more to the banks and things will decline during the year, but I think - so I don’t have more information about that issue.
Daniel Djurberg
Thank you.
Operator
Thank you. Our next question comes from the line of Daniel Thorsson from ABG. Please go ahead.
Daniel Thorsson
Yes. Thank you very much and welcome Laurinda. Two questions. First one on the peers. We see here profitability focus on leaving growth ambitions behind obviously, should we see that as a positive change in competition for you? Or is there anything else to read into that regarding mid-term growth in the markets that there may - that there may be a risk that many of you have overestimated the sustainable market growth that is being adjusted now by those peers?
And that’s the first one. And then, the second one on the email segment, is the strong organic growth in the current quarters a result of that product being lower-cost communication channels than the text message? So when we take their message is coming back, could that be a headwind for email? Or is that really to over analyze the strength there?
Laurinda Pang
Yeah, I'll try and answer some of it and again the guys can add in. But first of all I think, it's super important that we all remember that Sinch is profitable and has been since day one, and I think that's something that we are very proud of and we will continue to be an important part of how we operate this business . That's first and foremost. The competition that you mentioned, certainly is striving for profitability, but it will be a long time before digest it a given some of the language that they've shared with the market more broadly.
I don't think that their quest for profitability is because that we have underestimated the marketing ends and the market opportunity. I think, quite frankly that, it's an economic reality that all businesses are living work today. Their profitability is important. It makes logical sense and so appreciate the fact that they're striving for it.
Some of the actions that they have taken to achieve profitability were just the quest rewards profitability. That benefits us quite honestly because they are having to take significant costs out as the business models some of which has impacted customers. And those customers are experiencing that decoration of service, Sinch know is able to take advantage of that quite honestly. And we service our customers in a way that is superior to what they've experienced with some of the competitors. And while we have a a focus on costs, certainly and we will continue to be so.
We have not had to take the dramatic changes or have not – have take the dramatic that some of our competitors have had to. So, a long-winded way of saying, we're very proud of the profitability. Demand absolutely is still there. And we can take advantage of the challenging environment that some of our competition has found itself.
Roshan Saldanha
Did we answered your questions, Danny?
Daniel Thorsson
Yeah, absolutely. That’s great.
Laurinda Pang
Thank you.
Daniel Thorsson
And then the second one on emails strength.
Roshan Saldanha
Yeah, I think it’s – I mean email has been around a long time and the survival of sheet for many use cases in fact it’s a forward option for many use cases instead of - our belief is that from a long-term perspective this is going to be about what the best customer experience rather than simply about costs, right? And in many cases, text messaging is a superior alternative in the sense that has had a higher rebate and some small immediate and also to bit large certain use cases like care, it would be concentration on messaging. It’s a more effective alternative which was to believe underlying our long-term business in each product. So, short-term levers, in terms of cost, I think the long-term it’s more about sort of how you been able to experience mostly.
Daniel Thorsson
Yeah. I see. That makes sense. Thanks.
Operator
Thank you. Our next question comes from the line of James Pavey from Bank of America. Please go ahead. James, your line is unmuted. Please proceed with your question.
James Pavey
Sorry about that. Thanks so much for taking my question. Thomas, a quick question for you.I think earlier in the call, you mentioned that most of the conversations that you had with going forward customers is about quite impressive in half – last quarter. And have you seen – can you give any color on what those competitions like this year. And then relatively, a quick question, in FY ’22, I believe your revenue – 21% of your revenue was only to help hang up. If I look back to your FY ’21, on particular basis, any indication kind of what the trends of the top 10 customers? Thank you very much.
Thomas Heath
Thank you, James. Now, I think, what we're trying to - as the world is current during 2022 and many businesses started to reassess that they're operating their ways of working and started to address costs. And the use of communication is one of many cost and have been reviewing. We started to take notice of it especially in our messaging business and our voice business during the autumn.
And that's what we called out in earnings calls. And so, for that type of dialogue to turning to something concrete, we think this has played out as we expected and they have been that’s fairly worsen. But, with a caveat only we never know what the future holds and how macroeconomics will develop, we do think that it’s played out how we expected in our numbers. But we are not fielding back longer, if that makes sense.
That was answering your first question.
Roshan Saldanha
And some concentration, I think the dot one to that change is that customer filtration are getting behind. So the top end share bottled about these continues to decline.
James Pavey
Perfect. Very helpful. Thanks very much guys.
Operator
Thank you. Next question comes from the line of Laura Metayer from Morgan Stanley. Please go ahead.
Laura Metayer
Good afternoon everyone and thank you for the introduction, Laurinda. I have two questions, please. The first one is, could you clarify your headwind from the discounts to launch customer in messaging will be fully in the base in Q2? What I'm trying to understand is, whether that happened at the beginning of the quarter in the middle or towards the end of the quarter?
And if it's fully in the base, is it fair to assume that we should see positive organic growth for the rest of 2023 now that is behind you.
Thomas Heath
I think on the first question, the price impact is on the cost related to Q2, Laura. So, it’s fully in the base after Q1. There is also a only kind of this customers also so, that's that happened gradually during the year being again as we commented on it in the messaging segment in general that as is fall in declines. So that's all seen up with age, but the price impact is.
I think we speak specifically to the back that excluding this customer impact I think on in Q1, we would have had achieved within messaging must give some meaningful possible builds. We are not guiding or kind of go with this.
And then, your second question, Laura.
Laura Metayer
It’s around the adjusted EBITDA.
Roshan Saldanha
Yeah, and I think that goes back to the scalability more upwards and downwards in our messaging business than we do have a seasonal impact where it’s starting and especially in Q4 it tends to be stronger commercially active covers for enterprises and then we do tend to – we do see a weakening in Q1. Also it’s got to do with the number of working days. I mean, through the Q1, we do have short months in February and see what basis was. So I think that kind of facing to the margins.
Laurinda pang
The final thing I would add if I may, Laura is that, again we noticed that there were close to 40 new customers in messaging in Q1. We haven’t seen the revenue impact, and that takes little bit of a time to ramp. So that means revenue will shoot up in subsequent quarters.
Laura Metayer
That’s very helpful. Thank you both.
Operator
Thank you. Our next question comes from the line of Mohammed Moawalla from Goldman Sachs. Please go ahead.
Mohammed Moawalla
Okay. Thank you very much. Hi, Laurinda. Hey, Roshan, Thomas. First of all, Laurinda, as you look at the business, you talked a lot about efficiency about kind of operating more efficiently but also growing. I am just curious to understand, do you feel that it is just better integration and extracting perhaps more efficiency and savings or do you see the scope for the business to potentially shrink in size and drive more kind of focus to drive – to deliver on that, because a few things just gone through a lot of M&A prior to the last 12 months.
Second one for Roshan, I mean, obviously cash conversion was still very strong in the last year. It’s come down in Q1. Can you give us a sense of how long, perhaps some of the payable to affect a reversal or continue and should we think of – when do you expect to kind of hit the runrate for the 40% normalized runrate? Is it something likely to be sort of in the second half of the year or is it more likely to be a ’23 event? Thank you.
Laurinda pang
Hi, Mohammed. Good to meet you and thanks for the questions. I think the essence of your first question is, do I anticipate or foresee any divestitures and the quick answer to that is no. The Sinch portfolio I think is very comprehensive and is poised to grow proactively and go forward. And in terms of operation more efficiently is or operational excellence you can find that in a lots of different places within the organization, with any sales organization quite frankly.
And so as we think about business processes, as we think about the tools in the systems that we need to operate the business as we think about the amount of people we have facing particular functions, particular customers and so, all of that needs to be assessed. And there is quite a few opportunities to do that here. So, that’s what I am talking about. I am not talking about divestitures.
Roshan Saldanha
And let me, on that second question there, I think as you rightly have been, right there is strong cash conversion last year. I think then there are only 12 months including Q1 where it is advantaged. What we have believed of course is that we should be in this business to generate cash conversion of somewhere between 40% to 50% on a going basis, on a continuing basis.
Now, when we talk about cash conversion, we include CapEx, interest and tax and obviously, within an increasing interest environment, we do have negative impacts from that. Q1 also tends to be a quarter where we have slightly higher, seasonally higher tax payments as we close out 2022. And then kind of, as you said, as you identified, we do have decreased accounts payables that I also included in my remarks.
On the other hand, DSO continues to trend strongly. Now, working capital can be a bit lumpy from quarter-to-quarter, but I believe that that we will continue to generate strong cash for the rest of 2023 and we will continue to be leveraged and this will go up a little bit in the longer term up and down a little bit in the longer term, in quarter to quarter, but we are convinced that 40% plus cash conversion is very much on the table for Sinch.
Mohammed Moawalla
Sorry, that – it’s based – is it 40% on the table for 2023?
Roshan Saldanha
More than that, yes, more than 40% is on the table for 2022, yes.
Mohammed Moawalla
Okay. Thank you, Roshan.
Roshan Saldanha
Thank you, Laura.
For further details see:
Sinch AB (publ) (CLCMF) Q1 2023 Earnings Call Transcript