Sinch AB (publ) (OTC:CLCMF) Q2 2022 Earnings Conference Call July 21, 2022 8:00 AM ET
Company Participants
Thomas Heath – Chief Strategy Officer & Head of Investor Relations
Erik Fröberg – Chairman
Johan Hedberg – Interim Chief Executive Officer
Roshan Saldanha – Chief Financial Officer
Conference Call Participants
Predrag Savinovic – Carnegie
Stefan Gauffin – DNB
Andreas Joelsson – Danske Bank
Daniel Thorsson – ABG
Daniel Djurberg – Handelsbanken
Pontus Wachtmeister – SEB
Andreas Markou – Berenberg
Deepshikha Agarwal – Goldman Sachs
Operator
Welcome to the Sinch Q2 2022 results. Throughout the call, all participants will be in listen-only mode, so there’s no need to mute your own individual lines. And afterwards, there will be a question-and-answer session. Just to remind you, this conference call is being recorded.
I’ll now hand the floor to Thomas Heath, Chief Strategy Officer and Head of Investor Relations. Please, begin your meeting.
Thomas Heath
Thank you very much, operator, and good day, everyone. Welcome to the Q2 2022 conference call with Sinch AB. My name is Thomas Heath. I’m Chief Strategy Officer and Head of Investor Relations. And with me today to present recent developments are Erik Fröberg, our Chairman; Johan Hedberg, our Interim CEO; and Roshan Saldanha, our CFO.
With those opening remarks, may I ask the operator to switch to slide two and hand the word over to our Chairman, Erik.
Erik Fröberg
Thank you, Thomas, and good morning — good afternoon, everyone. I’m Erik Fröberg, Board member in Sinch since 2011 and Chairman of the Board since 2015. I also represent Neqst the largest shareholder in Sinch.
The reason that I’m here is that the Board yesterday announced that we will initiate a search for a new CEO. In the past few years, Sinch has grown rapidly, both organically and through acquisitions and Sinch has established itself as a global leader in cloud communication and customer engagement.
We have followed a well-defined strategy. We’ve acquired eight companies in the last two years in 2020 and 2021. Through these acquisitions, we’ve strategically repositioned the company and we’re very confident with the strategic and market decision the company has today.
Despite our strong strategic and market position, Sinch is today facing some challenges, both external and internal. External challenges are related to changes in the macroeconomic environment, high inflation, increased interest rates, higher cost of capital, the current geopolitical situation.
This all leads to changes in investor behavior, where investors focus more on profitability, cash flow and to avoid risk. This is something we believe we can cope well with, since we’ve been profitable since day one since the establishment of Sinch.
As regards to internal challenges, they’re mainly related to slowdown in gross profit growth in the messaging segment in the last three quarters, combined with continued increase in operating costs. This has resulted in lower profitability.
The Board of Directors’ assessment is that after a period of large acquisitions, we are entering a new phase where we need an increased and stricter focus on profitability and cash flow. We will also focus on consolidating the acquisitions, integrating platforms and extracting synergies.
In discussions with Oscar Werner, we have come to a conclusion that we need a new CEO for this new phase and have therefore announced that we will immediately start the search of a new CEO. I would like to take this opportunity to thank Oscar Werner, who has led the company through four years characterized by strong growth and many acquisitions.
Johan Hedberg will take over immediately as Interim CEO. Johan is one of six founders of Sinch. Johan was also the CEO of the company between 2010 and 2018. Johan knows the company extremely well.
Several Board members know him since his period as a CEO and the Board is confident that Johan will be able to take the right steps to improve financial performance, profitability and cash flow and also to implement the cost-cutting program that we’ve announced today. Johan will be Interim CEO until we have found a new permanent CEO and the new permanent CEO is in place.
With these initial words, I will turn over to Johan Hedberg, our new CEO.
Johan Hedberg
Thank you, Erik. So my name is Johan Hedberg. I’m one of the co-founders of Sinch back in 2008. I was the CEO from 2010 to 2018 and since 2018 been working with our M&A strategy and execution of that strategy. So I spent a long time with the business and know the market well.
The marketplace is there. We have 150,000 customers including eight out of the 10 of the world’s leading and demanding tech companies. This is resulting in 19,000 customer engagements every second year round. We have grown rapidly, and now is the time to extract revenue and cost synergies.
Priorities are in the following order: one, cost control in Messaging and central functions; two, profitability and cash flow; three, growth. We need to prove economies of scale improve operational efficiency and work to extract cost synergies from acquisitions within the Messaging segment and central functions.
The marketplace is attractive and will also drive initiatives to enable growth. Sell more services cross-sell into our combined installed base optimize the different go-to-market strategies to win customers at lower cost, focus product development close to the customer where we can get rapid return on investment.
So, I’m looking forward to dive in. I wish to thank Erik and the Board for the trust. So with that, I’m handing over to Roshan to present the quarterly report.
Roshan Saldanha
Thank you, Johan and thank you, Erik. Good day to everyone joining this call and webcast. This is Roshan Saldanha, Group Chief Financial Officer for Sinch. I’m going to walk through the results for the second quarter of 2022 on behalf of the Sinch’s team.
Operator, could you please turn to Page 4? Sinch is a global leader in cloud communications and mobile customer engagement. We had SEK 22.3 billion of net sales during the last 12 months and over SEK 2 billion in adjusted EBITDA in the same period. In addition we generated nearly SEK 518 million in free cash flow to equity during the first half of 2022. We are operating in a global multibillion dollar market, have over 150,000 customers and have been profitable since our foundation in 2008.
Operator, could you please turn to Page 5? Sinch has two financial targets. One of them is to grow adjusted EBITDA per share more than 20% per year measured on a rolling 12-month basis; and the other one is to keep leverage as measured net debt over adjusted EBITDA under 3.5 in multiple terms.
Our strategy has been to combine organic and acquired growth. And as you see on this page, we now see 49% growth in the second quarter on a rolling 12-month basis, following the closing of major transactions in late 2021. This metric is, of course, affected from the timing of share issues and consolidation of acquired companies.
Let’s turn to Page 6. Here we present some highlights from the second quarter. Number one, I think is strong cash flow. We have net sales on a total basis growing 80%; gross profit 123%; and adjusted EBITDA at 77%.
The quarter is affected by a reassessment of reserves or accrued traffic costs, which affect gross profit EBITDA and adjusted EBITDA in the Messaging segment by SEK 162 million.
We reported adjusted EBITDA of SEK 503 million and cash flow from operations at an improved level of SEK 668 million. The last 12-month pro forma net sales were at SEK 25.6 billion with a gross profit at SEK 8 billion.
We have a stable and growing business in the Voice, Email and SMB segments. The Voice segment has a gross margin of 46% and an adjusted EBITDA margin of 21% for the quarter.
The Email business has a gross margin of 73% and an adjusted EBITDA margin of 37% for the quarter, which is affected by the migration of hosting providers in the Email segment. And the SMB business then has a 61% gross margin and a 28% adjusted EBITDA margin.
We are operating the business as per the new operating model, which was released in February, or announced in February of 2022 where each of the five business units have full P&L responsibility. I will come back a little bit later to how this reflects in the various segments.
And then thirdly, we are announcing today a cost reduction program in the quarterly report focused on the Messaging segment and group functions. This cost reduction program is driven by the lower growth in gross profit that we have seen during the last nine months and margin pressure. In addition, we have a price adjustment to a large customer impacting the current quarter. And looking forward, we are seeing macroeconomic uncertainty in various markets that we operate in.
We are targeting gross savings of 10% in the Messaging segment and central functions through this program, which corresponds to about SEK 300 million on an annual basis. And we expect that, the program will have full effect from Q3 2023, but that we will have incremental increased savings during the quarters until then as well.
Operator, please turn to page – to the next page, page 7, which shows a bridge of gross profit from last quarter 2021 – from the last year Q2 2021 at SEK 869 million to the reported gross profit this quarter of SEK 1.937 billion.
As you can see, foreign currency movements affect this gross profit this quarter on a – with 10% or SEK 83 million. In addition, we have a growth of 138% coming from acquisitions with Inteliquent being the – or the business related to Inteliquent being the largest contributor at SEK 652 million, MessageMedia at SEK 277 million; and Pathwire at SEK 260 million; and then finally MessengerPeople which is the other M&A at SEK 13 million.
In the organic, including the changed reassessment of cost of goods sold grew with minus – or reduced by 25%. The largest part of this being of course the reassessment of SEK 162 million, but in addition to that we had an organic decline of 55%, which is approximately four percentage points.
If you look at the pro forma base as though the acquisitions would have been part of the business from – for the entire part of 2021, then the pro forma organic gross profit growth was at 0% or flat.
In addition, when we look into the Messaging segment further in detail we see that price negotiation with one of our largest customers in Messaging hampers gross profit growth by 9% on an organic basis. We see however continued growth in Email and SMB. And in addition now, due to the overall growth of the group, we see also that our customer concentration reduces where the largest customer now is 5% of group gross profit, with the top 10 customers accounting for 20% of the profit.
Operator, please move to the next page on OpEx development. Here you see the adjusted OpEx, which is the OpEx between gross profit and adjusted EBITDA. And we reported an adjusted OpEx of SEK 1.434 billion for the quarter, of which SEK 791 million came from the organic business, and SEK 643 million from acquisitions that were done after Q2 2021.
You see that, there is a significant increase in year-on-year organic OpEx going from SEK 586 million to SEK 791 million this year. The largest part of the OpEx that we have in this company relates to personnel both employees as well as staff augmentation. The personnel related OpEx is stable in the second quarter versus Q1.
The cost reduction program, of course is targeting primarily the Messaging and group functions, which is then the bar that is shown in green of SEK 791 million for the quarter.
Let’s move on to the next page, which is then showing the new operating model. Here we have the five business units that the company is organized in, Enterprise & Messaging, Applications, Voice, Developer & Email and SMB. You also see the different gross profit profiles, gross margin profiles and adjusted EBITDA margins on this page. The focus in 2022 for Enterprise & Messaging is of course on the cost reduction program, achieving economies of scale and efficiency, as well as then recovering gross profit growth and increasing cross-sales of other products to large enterprise customers.
In the Applications segment, also there is a focus on cost efficiency, but in addition to that product unification and international expansion. In the Voice business unit, which is equal to the Voice segment, the focus is of course on cross-sales of Voice and Messaging, as well as international Voice expansion. The business is hampered currently by the 8YY reform that reduces revenues and gross profit for Voice.
On Email, we have a continued focus on profitable growth, as well as on cross-sales of Email to Sinch enterprise customers and cross-sales of SMS, both to Pathwire enterprise customers, as well as to the developer community that Pathwire engages. And then finally coming to SMB, we can see continued growth in the United States through new customer acquisition, as well as we have in the quarter completed an integration of SMS back-end to the Sinch global platform and extended omnichannel capabilities, leveraging Sinch conversational API.
To give some other highlights from the business, from these various business units, I would like to maybe point to the fact that in the Messaging segment, we have now launched the MessengerPeople product for chat-based customer service through next-generation messaging in Brazil.
In the Voice segment, we also announced on the 9th of June that the company had become a Microsoft Teams Operator Connect Partner, which means that the company solutions can be used to connect outbound calls from Microsoft Teams. In the Email segment, we were encouraged by the fact that we signed the largest contract to date in that business, which was closed during the quarter in the form of a multiyear agreement with a new customer in the public sector.
And then in the SMB business unit and segment, we have one of the largest mobile operators in Australia now offering Sinch’s SMB platform under its own brand. In addition to these five segments — to these five business units, we of course have the central functions, which is reported under the Other segment. And the cost for the central functions during this quarter amounted to SEK 103 million, consisting mainly of employee expenses in finance, HR, IT and other staff functions, as well as office facility costs.
Operator, could you please move to the page number 11 please, where I will start to walk through the financials. As you see on this page, we have reported a gross profit of SEK 1.937 billion, which is affected by the reassessment of reserves for accrued traffic costs that I mentioned earlier of SEK 162 million. We had an EBITDA of SEK 528 million for the quarter versus SEK 152 million for the same quarter last year. The EBITDA is higher than adjusted EBITDA this quarter due to currency effects.
Depreciation and amortization was SEK 577 million, which includes of course noncash amortization related to acquired entities. And we have reported an adjusted EBIT then which excludes the depreciation and amortization effects, as well as the one-off effects in EBITDA amounting to SEK 390 million for the quarter.
Moving to Page 11, we bridged cash flow before changes in working capital to adjusted EBITDA. We would like to highlight in this quarter that the cash flow before changes in working capital is affected by realized currency effects on financial items, which then is reflected in the line Other items and impacts the second quarter by SEK 248 million negatively.
Operator, please move to Page 13, where you see the full cash flow. And then continuing on from the cash flow before changes in working capital, we had a recovery in working capital development in the second quarter compared to the negative development in the first quarter and therefore see an improved change in working capital of SEK 579 million.
On a rolling 12-month basis, the change in working capital is affected by about SEK 500 million addition of working capital within acquired businesses. This is a strong financial profile with a diversified earnings pool coming from many different customers and many different products and business segments. And the net cash – the net debt decreased by SEK 326 million during the quarter.
We understand also that from the discussions that we’ve had and the reports that have been shared online that there is some questions around receivables. And we would like to take this opportunity to clarify those questions and therefore we have added a few pages around receivables and revenue recognition.
Firstly, I want to say that no revenue is recognized at sale. It is recognized when the performance obligations are completed. We are on Page 14 now. When you look at the balance sheet, we have the item unbilled accounts receivables, billed accounts receivables and accrued revenue. The unbilled accounts receivables are of course not yet been invoiced to the customer but where we have an unconditional right to payment. These are recorded as revenues when the performance obligation is completed. And typically they are invoiced to customers within a few days after the period end.
As at 30th of June, 2022, we had SEK 1.8 billion roughly in unbilled accounts receivables. Billed accounts receivables are also then where we have an unconditional right to payment. Again they are recorded as revenues when a performance obligation is completed. And they have been invoiced as per the same schedule that we have for unbilled but they have been invoiced before the reporting period. We had as at 30th of June, 2022, SEK 2.8 billion in billed accounts receivables.
And then finally, we have contract assets, as accrued revenue or accrued income from customers. The difference then from accounts receivable is that there we don’t have an unconditional right to payment. However, they are recorded as revenues as and when the performance obligation is completed. And again, the invoicing would follow a normal typical schedule as well for these revenues depending on the customer contract and the completion of the performance obligation. And we have SEK 91 million as at 30th of June, 2022 in accrued revenue or accrued income from customer contracts.
In addition, of course, we have expected credit losses reserved as of 30th June, 2022 of SEK 169 million. And even the accrued revenue figure shown above is shown net of an impairment reserve.
Operator, let’s move to Page 15, where we show the full breakdown of current assets from the quarterly report. As you can see, in this breakdown, our accounts receivable and accrued revenue when taken together has grown with 1% compared to Q1 from SEK 4.579 billion to SEK 4.614 billion. It’s important to consider here that our business is mostly in the US and we have a large number of US dollar-denominated customer receivables.
The US dollar when comparing the closing exchange rates from Q1 to Q2 of this year moved with more than 10%. And therefore on a like-for-like basis, the US dollar-denominated portion would have increased by 10%. The movements in other major currencies like euro and pound are not as significant. They are in the 2% or 3% range. But the U.S. dollar movement was quite significant. So on a like-for-like basis a 1% absolute growth actually means a decline — a slight decline on an underlying basis.
And then, again moving on to page 16, as we did in the first quarter we would like to show you the development of days, sales outstanding and days payables outstanding. And again on days sales outstanding, we have a more or less flat development versus Q1 despite the fact that revenues have increased by 1% compared to the first quarter and more than 18% compared to last year on a like-for-like basis. And then on DPO of course we have to remember that there is a limited DPO change compared to Q4, but a large change compared to Q1 here.
Finally a couple of closing slides. Moving on to slide 17 just reminding you about the rising gross profit for Sinch where on a pro forma basis we would have had SEK7.7 billion in gross profit in 2021. If — on a reported basis most of that gross profit of course came from messaging and a smaller portion from voice. But on a pro forma basis we had a much more diverse pool of earnings with 46% coming from messaging and 32% from voice, 11% from Email, and 11% from SMB.
Moving on to page 18, I would like to again reiterate our financial targets which is adjusted EBITDA per share to grow more than 20% per year and net debt to remain under 3.5 times adjusted EBITDA overtime. And adjusted EBITDA per share grew 49% in the second quarter measured on a rolling 12-month basis. And pro forma net debt over EBITDA — or over adjusted EBITDA our leverage measure was at 3.3x excluding IFRS 16-related leases which is still below our target.
With that, I would like to hand over to Erik for — if you have any closing remarks before we open up for Q&A. Erik?
Erik Fröberg
Thank you, Roshan. Okay just some final remarks here. The result in Q2 is similar to the result in Q1 with the exception of an, increased reserves for COGS related to 2021. But we have significantly better operating cash flow in Q2 than in Q1. We will continue to execute along the strategy that we have established.
However, we will move into a new phase in the history of the company. We have announced a cost reduction program. We’ve also appointed a new interim CEO. And we’ve initiated a search for a new permanent CEO.
Our focus going forward will be on and in this order: cost control in particular in messaging and central functions; two profitability and cash flow; and three growth and I say this again in that priority. Those were my final remarks. And I now hand over to Thomas.
Thomas Heath
Thank you, Erik. Operator, may we have the first question please?
Question-and-Answer Session
Operator
Thank you. That’s from the line of Predrag Savinovic of Carnegie. Please go ahead. Your line is open.
Predrag Savinovic
Thank you, Operator. Good afternoon Roshan, Johan, Erik and Thomas. And my first question is on cash flow which was quite strong in this quarter. And Erik in the Chairman of the Board letter you explicitly state this was a big improvement. And that being said you also say there’s further potential.
So maybe actually this is a question to Roshan whatever you prefer but on cash flow for the remainder of the year, do you think there will be more working cap buildup? Should it be neutral? Further releases, what can you say on this topic? Because in the past quarters it has been lumpy so intuitively you could expect that Q3 could be less encouraging. So if you could be as specific as you can be on cash flows for Q3 and Q4 that would be very helpful. Thank you.
Roshan Saldanha
Yeah. I can try to answer that one Predrag, Roshan, here. I think as I usually say, I mean the business happens every day but working capital is measured at only four times — four points in time in the year. So, it’s of course, very difficult to give an exact prediction as we have quite large customers. I mean the payment of one invoice a couple of days later can affect reported working capital.
But all else equal and disregarding those kind of one-off impacts, I mean we have had a working capital buildup during the last 12 months, partly also led by prepayments for traffic costs that were made during Q3 of 2021. And these are — this is a working capital buildup that we absolutely expected to and expect to release during 2022 on a continuing basis.
I think we have seen good progress here in the second quarter, but we’re not completely satisfied yet and we see more potential to further improve that. I think the long-term goal for us of course is to have a low working capital level and operate at a low working capital level across the group and that’s what we will aim for.
Predrag Savinovic
That’s very clear. Thank you. And then just a question on the gross margin and specifically on the customer contract where you mentioned there has been price adjustments and there’s been a drag on the gross profit growth from this renegotiation.
So, I take it this is likely your largest customer. And by the sound of it, it’s quite large. So, I’m wondering has this been a flat-out reduction, or have you gotten anything back? Asking this in terms of have they committed to buying Voice products or Email products or anything like that or in addition to you providing this price reduction?
Roshan Saldanha
I can invite Thomas in on that one. Thomas do you want to make a start?
Thomas Heath
Sure. Thank you, Roshan. Yes, so as Roshan mentioned, we have some very large customers who we’ve worked with and serviced throughout the years. We very much look for a partnership model where we thrive when our customers thrive. We’ve had a long period of growth including this particular customer and we’re very happy with that long-term relationship.
We found ourselves in a situation where the customer had grown to a size that some price adjustment is warranted given what the marketplace looks like. We choose to take the long-term view here to ensure that we can have continued positive growth with this and other customers.
I think Roshan touched on this earlier. If you look at the full group, our largest customer is now around 5% of gross profit and the top 10 customers account for 20% of gross profit in the second quarter. This is a change versus before where our earnings pool has been diversified.
Going back specifically to your question, you can see that it’s quite a clear effect on revenues and it’s 100% incremental margin, of course, on that shortfall. We believe we can come back to growth with this customer. But of course this is something that will weigh on us over the coming years coming four quarters.
Looking at profitability, we think we are at a level which is which reflects the size and which is competitive. So, in that sense this is a good starting point for the future and it’s a very healthy relationship with a broadened product engagement. So, hopefully that gave some color Predrag.
Predrag Savinovic
Yes. No, that’s clear. But just finally on the final part of the question is that will that customer do you think or do you have any expectations of them buying from your other products in your portfolio having done this renegotiation?
Thomas Heath
I mean that’s certainly our ambition. We have a world-leading portfolio of products for both Messaging, Voice, and Email. And of course, we’ll take every opportunity including this one to increase the scope of our business with every particular customer, increase stickiness, and add more value ultimately. So that’s something we hope we can get back to more in the future.
Predrag Savinovic
Superb. Thank you very much.
Operator
Thank you. Our next question comes from the line of Stefan Gauffin of DNB. Please go ahead. Your line is open.
Stefan Gauffin
Yes. I would like to start with this price discount. You mentioned price discounts to large customers in Q1 2021. Was this customer part of that price discount? And I mean is it likely that we see other customers coming back here? Also just to get the flavor was the full impact from this price reduction visible this quarter, or will the full impact be visible first in the coming quarters? I’ll start with that.
Roshan Saldanha
Thank you, Stefan.
Thomas Heath
Yes I’ll follow up there. The impact is the start of this quarter so you are seeing the full impact of this price change from the beginning of this quarter. We have talked about price adjustments towards one of our largest customers over the previous quarters. It’s the same customer where we have made point adjustments to particular products regions and so forth.
We came to the common conclusion that it’s better to take a holistic view, secure our long-term partnership and find a working way of cooperation that both parties are comfortable with and that’s what we secured now. So this is an incremental change to some extent, but it’s fully reflected in the quarter.
In terms of other customers, we have a larger scale than most of our competitors. We don’t necessarily like to win on price, but we rarely lose on price if that’s what it comes down to. For large customers price is an important part of the buying decision and that’s going to be increasingly the case in this new macroeconomic environment that we’re entering.
So price is often of course a part. However on the Messaging side, there isn’t to my knowledge anything similar in terms of large customers where we’re in this situation where this type of adjustment would need to be warranted. Of course hard to say what the future holds. But again our largest customer is around 5% of gross profit and we think this is relatively isolated.
Roshan Saldanha
I think just to complement Thomas before you maybe — I think it’s important to just call out again that as we said our largest customer now is 5% of the business. So the potential for that — and we’re not seeing a general trend. So I mean the potential for an individual price negotiation to have an impact as large as we see now is not large. When — I think your other part of the question Stefan was on the full impact.
Yes, I mean, I think we have seen the full impact in Q2. But I think it’s important to remember of course that volumes with individual customers and to individual destinations can vary from period to period and quarter to quarter. So it’s difficult to kind of exactly extrapolate, but yes we have a full impact from the negotiation in Q2.
And then I think just following up I mean as Thomas said I mean we have a broad discussion with our largest customers and we definitely see a potential to kind of broaden our — the products that we’re selling to our largest customers. And already in Q1 I think you saw an example where we had reported that one of our largest customers had bought an Email — a small transaction a small deal, but had bought Email from the Pathwire product portfolio. Back to you Stefan.
Stefan Gauffin
Yes. Then a little bit on the acquired entities. We did see the EBITDA margin coming down in Inteliquent compared to previous quarter. I’m just wondering why this is happening. Are you increasing the workforce within Inteliquent, or why do we see this situation?
Roshan Saldanha
Yes. I mean, I think, there’s — again, this is more to do things unknown. There’s the challenges when it comes to 8YY we have talked about, of course, and that reform kicked in, in July of 2021 and there is a next step down in July of 2022.
So in Q2, obviously, we continue to see the 8YY impact. In addition to that, I think, the kind of decline in margin is more related to phasing, rather than any specific business impacts that are affecting margin in Q2.
Stefan Gauffin
And then — well, actually, you mentioned that the 8YY reform reduced the gross profit growth with 9% in Q2 and that was the same in Q1. Now there’s a new step down, but can you comment a little bit on what we should expect in terms of impact on the gross profit growth?
Roshan Saldanha
Thomas, do you want to take that one?
Thomas Heath
Yes. Sorry, if you just help reiterate which segment were you referring to?
Stefan Gauffin
No, this is the Voice. And you mentioned that the 8YY reform reduced gross profit growth with 9% year-over-year in Q2 and that was the same as in Q1. Now, there’s a new step change, but you’re also facing easier comps. So just to understand the headwind in the second half.
Thomas Heath
Sure. So the headwind will ease somewhat versus today, which means that the, all else equal, the revenue and gross profit growth should improve in the second half of the year compared to what it was in the first half of the year. Then I think looking at Q2, a little softer than Q1, so bear that in mind. But incrementally the COVID — sorry, the 8YY headwind is easing in the second half of the year.
Stefan Gauffin
And then, just finally, on the Pathwire you had a migration to a new cloud Email platform. When will that be done? When can we see a return to a higher gross margin?
Thomas Heath
So that work is ongoing and progressing well, but it’s quite complicated. It’s a full shift of infrastructure provider. It will be completed during the second half of the year, so you should hopefully start to see some benefit in the last quarter. And that should, from this level, lead to some margin recovery in Email.
Stefan Gauffin
That’s perfect. Thank you.
Operator
Thank you. And our next question comes from the line of Andreas Joelsson of Danske Bank. Please, go ahead. Your line is open.
Andreas Joelsson
Good afternoon, everyone and thanks for the presentation. And I have very much respect for that the outlook is uncertain, given the macro scenarios. But, I guess, you have done some scenarios of where things could end up. And just curious when you look at a quite bad scenario, what kind of tools do you have to still deliver gross profit growth from an organic point of view and an organic adjusted EBITDA growth for, maybe, when we look into 2023?
Roshan Saldanha
Yes. Thanks, Andreas. I think this is a good question. Obviously, I mean, we don’t — kind of we don’t share any forecast going forward. But I think it’s — I think, this is a question that we can kind of reason around a little bit, right?
And, I mean, the way we are — when we are looking at the market today and if you break this down into the different segments, I mean, essentially, we see good continued growth in SMB in the US market and still growth in the home markets of Australia and New Zealand, but not as strong as in the US market.
Now remember also that a large part of the SMB kind of customer base is of course, more of a long-tail nature. So there are customers that are buying online and therefore, our customer concentration is not that strong. And we have the possibilities to — we have the diversification in that customer base. So the growth is really coming from a broad base of customers.
On — the same is partially true also for Email, I mean where we are taking cost actions by migrating hosting provider. And right now, we have a slightly depressed gross margin, due to having duplicate costs for hosting providers, which should then release as Thomas said, later on this year. And we will see the impacts of that hopefully, during 2023, if the kind of technical project is completed during this year.
And then when looking at Voice, I mean I think, here I mean, the potential for us is more kind of expanding the Voice customer portfolio to enterprise customers, from the more traditional customer base that Inteliquent has enjoyed, which by the way is performing quite strongly as well when looking at it excluding the 8YY reform impact. But, I think there’s quite a large potential to kind of cross-sell Voice to our Messaging and Email enterprise customer base.
And then on the Messaging side, which is a little bit the — has been the concern of course from a gross profit growth perspective during the last three quarters, I think it’s important to remember that as we’ve said before, that our growth has been fairly concentrated, which we have been talking about even though our base — we have a number of our customers that the growth came from a fewer number of customers.
Now we’re of course, seeing that as the business from these customers has grown and scaled, I mean, we’re seeing effects from price renegotiations. And also, we have continued impacts, which started during last year from kind of the situation in LatAm, where there is of course, a macroeconomic factor but it’s also our own development our own business development that contributes to it.
Now looking at the rest of the business within Messaging segment, I think we have some positive sides as well. I think when we talked about India, for example, the last two quarters, we have talked about the impact of additional costs from operators for Digital Ledger Technology. But we see here in Q2, a slight recovery on the Indian business and good growth. We also see that other segments of our customer base are growing well. And I think, that’s what we will continue to focus on under the leadership of Johan, to kind of make sure that we focus on the right opportunities that deliver growth in the short-term, so to say, as you want. Anything, that you’d like to add? Okay. Andreas, I think that was it.
Andreas Joelsson
Okay. Just one final from me. Is there any, debt that is to be refinanced or repaid or any additional acquisition purchase prices that will be paid within the next year or so?
Roshan Saldanha
Again, I don’t think there are any material additional purchase prices that are outstanding firstly. And then on the debt side, we of course have the obligation, which has an incurrence test at a leverage level of 3.25. Now there are slight differences between how that is measured and the reported net debt is measured. But that incurrence test is only triggered, if we take up new debt so it’s not triggered otherwise. And, yes, so I mean at this moment we are still under our thresholds, so to say. But of course, going forward super important to keep our focus on profitability and cash flow.
Again, as I said earlier in my comments, I mean, we have about 40% of the debt is US dollar-denominated and the fact that the US dollar has moved quite strongly from Q1 to Q2 is of course, increasing our net debt as well. So that has a particular — that has some net debt impact during the second quarter.
Andreas Joelsson
Perfect. Thanks a lot.
Operator
Thank you. And our next question comes from the line of Daniel Thorsson of ABG. Please go ahead. Your line is open.
Daniel Thorsson
Yes, thanks very much. I think it relates a little bit to Andreas’ first question here, but just to understand how the new strategy or at least the prioritization that Erik presented in the beginning will affect the business in practice. What type of growth opportunities will you prioritize less as you change the priorities stated out now? Are there any regions like Brazil that you mentioned as a tough market that you may reduce your efforts in or any type of businesses like big price-sensitive tenders? Anything you will change practically for us to understand where you’re moving from here.
Roshan Saldanha
Thomas?
Thomas Heath
Thank you for that question. I think there are a few different things and Johan will of course – and we will come back with more info in upcoming quarters. Of course one aspect is just generally to focus and to focus in areas where the payoff is relatively immediate, all things equal to increase focus on the bit more mature products while still protecting investments in other areas. So that’s a balance at any point in time. And of course competition is facing similar or even harsher priorities, which also affects the situation.
When it comes to Brazil, it’s a quite specific situation, where we have a detrimental development that we need to address. Part of this is of course related to the overall market and part of this has to do with our execution. Of course as we touched upon earlier, it’s uncertain. The overall message would be that we need to safeguard our financial performance to continue to deliver profitable growth regardless of the macroeconomic outcome.
Roshan Saldanha
Yes. I think just to I mean just to give you one very concrete example, right? I mean I think as I said – we’ve said in previous calls that we’ve acquired Pathwire, who are of course besides the fact that they have a strong e-mail product portfolio, they’re also very strong on the developer go-to-market. This is something that Sinch has not invested in before.
Now taking a mature product like SMS to the developer go-to-market has tremendous advantages and that is a product investment that we would for example weigh against investments in RCS or in conversational messaging and look at balancing those. So I think that is just one such example of questions that we will need to evaluate further.
Daniel Thorsson
Yes. Okay I see. That’s helpful. Well, it will be interesting to hear in coming quarters then to see what you decide to prioritize here. And my second question is on another topic. I mean you said very clearly on here in the beginning that you feel confident with the business composition you have and post the acquisitions made in 2020 but I still have a question on potential divestments here. Have you discussed internally to divest any of the recent acquisitions that you have found out that synergies are limited, integration is difficult just creating a more complex business?
I mean given that your own valuation and the share is down so much in a year that could ironically create value and also address some key issues that the depressed valuation reflects today. I mean take Pathwire, Inteliquent, MessageMedia for example, which you acquired for more than SEK 10 billion less than a year ago, divesting one of those for half of the value just theoretically would reduce your net debt by 50% to 75% and also be at a higher multiple than you are trading at as well, which will then create value for shareholders and also take away the depressed multiple you have on your share as well. Is that something that you at least have discussed internally at all, or is that totally way out of this world?
Roshan Saldanha
Yes, I mean I think it’s a good question. Obviously, we’re evaluating all our businesses constantly and we’re looking at it the question. When we have and if we have any conclusions, we will let the market know. There’s nothing to say at this point in time. Maybe Erik wants to add something on this question.
Erik Fröberg
Well, I can make a short comment on this. And the simple answer is no, we have not considered or addressed this at all in the Board. We are always involved when we come to these type of discussions. We think that we have a very good — we think that the acquisitions we’ve done are all very good. They’re in line with our strategy. And we also think today that — and I agree with you that our share price is depressed but we do think that over time we will recover. And we think that the strategic position is very good that we have today with the acquisitions that we’ve done.
Daniel Thorsson
Fair enough. Thanks for that.
Thomas Heath
Okay. And we have the next question, please. I think we need to [indiscernible] otherwise we will look harm. So, please restrict your number of question.
Operator
Okay. That question comes from the line of Daniel Djurberg of Handelsbanken. Please go ahead. Your line is open.
Daniel Djurberg
Thank you, operator. And hi, Roshan, Erik and Thomas. I was wondering a little bit on the cost saving program, the SEK 300 million. If you can comment on the cost to deploy this and also the cash flow impact, how it will be impacting quarters coming? How much will be in 2022 and 2023, for example? Thank you.
Roshan Saldanha
Yes. I think I’ll keep the answer short Daniel. I mean I think we’re in an early phase of analysis, and we don’t have at this point in time any information to share on kind of the cost to deploy the program as well as kind of the phasing of savings. I think what we’ve said is we’ll reach the full impact in Q3 2023. So, we’ll keep that at that level for now.
Daniel Djurberg
Perfect. Another question if I may would be on the integration cost. Part of this cost reduction might be, I guess, within integrated and costs being SEK 250 million in the last 12 months and they’re still high at SEK 66 million in Q2. And the — obviously, we understand, it’s been higher on back of a lot of large acquisitions here in 2021. But how much — what would be a decent run rate do you think in the company going forward, if it’s possible to comment?
Roshan Saldanha
Yes. I mean the majority of these integration costs are related to the Messaging segment and to migrate platforms within the Messaging segment, which is going to be a key driver of savings going forward as well. We expect the majority of these migrations to be completed by the end of this year, early next year. So, in that time frame, we expect these costs to go down. We’re not providing specific forecast on the level of those costs.
Daniel Djurberg
Perfect. So, this is also with regards to SAP or the SD Interconnect…
Roshan Saldanha
SDI and Wavy — SDI, Wavy and TWW migrations are our significant drivers of the integration cost, yes.
Daniel Djurberg
And would you say that you’re on plan with these in terms of timing and so forth, or any issues in this integration? What are the perfect?
Roshan Saldanha
Yes. I mean technical projects are always challenging. So, I think our plan has been and is remains to be to complete this due by the end of the year. Let’s hope we can keep that.
Daniel Djurberg
Sounds good. Thanks.
Operator
Thank you. The next question comes from the line of Pontus Wachtmeister of SEB. Please go ahead. Your line is open.
Pontus Wachtmeister
Hi. Sorry. I’m [indiscernible]. Of course, it’s a bit noisy. I just wanted to have a — it’s very interesting to see this split now between the SMB and the larger clients in terms of gross margin. And I’m wondering, do you have a good grip on — I’m sure that the large clients give what we in Sweden call, which is they contribute to the a portion of the general cost of the business. But do you have a grip on — because generally what I feel is that large clients also demand a lot of attention. Do you think that they — that your margin in the large customer segment is sufficient to cover its part of EBITDA? So that is actually — it’s not profitable in the apps rather than just pulling a bigger cost base. That’s my question actually.
Thomas Heath
I can start off with that one Pontus. I think we have very clear profit objectives for each one of our business units and every one of our segments. Just to repeat that, we have a very clear focus on profitability. And it’s not the case that one part of the business is going to subsidize the other. As you rightly point out, we try to clarify the segment reporting and show you the business in the way we run it, which is also of course, how it should be done. And I think from – as you alluded to it’s pretty clear that, we’re seeing quite a different development across the group. The focus for us now is to fix the problem where problems need fixing and to continue to run the business well where the business is already performing well. And hopefully that will show in the numbers as well.
Pontus Wachtmeister
Okay. Thanks.
Operator
Thank you. The next question comes from the line of Andreas Markou of Berenberg. Please go ahead. Your line is open.
Andreas Markou
Yes. Hi, everyone. Thanks for the presentation, and of course taking my questions. I have three. I’ll pose them quickly. The first one is basically a repeat of the question I asked last time. Are you thinking of having an independent audit review, or is that completely out of the question? That’s the first one. And then I’ll pose the other two.
Roshan Saldanha
Yeah, I can take that one. No, we’re not thinking of an independent audit review.
Andreas Markou
Okay. And then on the interest rate on your debt, can you just confirm what is the annualized rate and that the underlying interest rate has not actually changed aside from the change in STIBOR?
Roshan Saldanha
I can confirm that’s the case from Q1, yes. I mean, we had – we did some refinancing, which we announced in the market. And obviously that’s the basis for our financing now yes.
Andreas Markou
Okay. And then your annualized interest rate is how much more or less?
Roshan Saldanha
Yeah. I think, I don’t have the number right in my head, but it’s – I think on an effective basis it’s slightly north of 2.1%, 2.2% it’s in that range.
Andreas Markou
Okay. Great. And then final from me is on your accrued revenue for the quarter. Why has it declined so much compared to history? Is it because underlying growth has actually slowed down, or is it because of cash collection?
Roshan Saldanha
No, I think it’s – I would say, it’s primarily due to percentage of completion levels being reached. Accrued revenue of course is revenue that we have recognized. But where there is not an unconditional right to payment then depending on when milestones as per customer contracts are completed, those accrued revenues will become yeah, in the most case typically billed receivables right before they are paid. And since this concerns a smaller portion of our business, I mean, the majority of these revenues come from a smaller portion of the business, it can be a bit lumpy from quarter-to-quarter.
Andreas Markou
Okay. Thank you very much. That’s all for me.
Operator
Thank you. And we currently have one further person in the queue that’s Deepshikha Agarwal of Goldman Sachs. Please go ahead. Your line is open.
Deepshikha Agarwal
Yeah. Thanks for taking my question. I have three. I’ll just try and keep it short. So first one is please can you comment on the phasing of the organic gross profit growth for the remainder of the year? Would it still – could it still be negative in the second half? And what does the path look like for the acceleration of the same in the year 2023? Will it still be back-end loaded? That will be my first question and then I’ll follow up with the next one.
Thomas Heath
Thank you for the question. We do not — if you guys — sorry there’s a bit of an echo here. Of course, let me try again. So thank you — sorry.
Deepshikha Agarwal
Yes. Then I have a follow-up on that large customer. I just want to understand like there was an impact in this quarter. How should we think about — like it was asked, but then should we — like should we expect extrapolate the same impact for the next coming quarters or it will vary from quarter to quarter going forward?
Thomas Heath
Thank you. I’ll try again. So, you’re talking about the impact from price change to one of our largest customers. You’re seeing the full impact in Q2 and you will continue to see that ahead then of course, offset by any underlying continued growth. In terms of phasing for the rest of the year which I think was your first question, we don’t issue guidance, but we reiterate our target of 20% growth in adjusted EBITDA per share.
Deepshikha Agarwal
Okay. And just the last one. So, leverage adjusted for leases is up to 3.3 times versus 3.1 times in the previous quarter. Like does your covenant calculate EBITDA including or excluding rent expenses? And at what level, is your first maintenance covenant?
Roshan Saldanha
Right. So again, I think obviously the main driver of the leverage increase, we’ve taken down net debt, but it’s the EBITDA development, of course that’s the main driver. And it’s got to do with also the fact that, due to the reassessment of reserves, we’ve had a hit on EBITDA during this quarter. When it comes to the question, again, we have not disclosed our specific covenants previously and we don’t intend to do that. I mean that’s in our contract. Suffice it to say that, our goal is to keep leverage below our target level of 3.5 and that’s also one of the reasons why we are bringing in a cost reduction program to make sure that we increase profitability and manage cash flow.
Deepshikha Agarwal
Okay. Those were my questions. Thanks so much.
Operator
Thank you. And as we have no further questions in the queue at this time, I’ll hand the floor back to our speakers.
Roshan Saldanha
So Thomas, do you want to close?
Thomas Heath
Thank you very much everyone for participating in this conference call. Any follow-up questions, please don’t hesitate to reach out to Investor Relations through the investors e-mail address. Thank you very much for the attention, looking forward to meet again in the future.
Roshan Saldanha
Thank you.
Erik Fröberg
Thank you.
Be the first to comment