Clx Communications Connecting People and Things to a World of Infinite Possibilities

CLX COMMUNICATIONS CONNECTING PEOPLE AND THINGS TO A WORLD OF INFINITE POSSIBILITIES

ANNUAL REPORT 2017

1 CLX COMMUNICATIONS ANNUAL REPORT 2017 CLX COMMUNICATIONS

CLX Communications (CLX) is a leading global supplier of cloud communications services and solutions for enterprises and mobile operators. Mobile communications services from CLX enable business critical communication worldwide via messaging services (SMS), voice and video services, and mobile connectivity services for IoT (Internet of Things). CLX has delivered profitable growth since it was founded in 2008 and generated sales in 2017 of more than SEK 3 billion. Profit for the year amounted to SEK 134 million. The Group is headquartered in Stockholm, Sweden, and has over 30 offices in more than 20 countries.

2,000+ 80+ 18 billion+ LISTED ON ENTERPRISE OPERATOR ANNUAL Nasdaq CUSTOMERS CUSTOMERS TRANSACTIONS STOCKHOLM

Please visit us on: www.clxcommunications.com

The annual report is published in Swedish and English. In case of any differences between the English version and the Swedish original text, the Swedish version shall apply.

2 CLX COMMUNICATIONS ANNUAL REPORT 2017 2017 IN BRIEF • Net sales amounted to SIGNIFICANT EVENTS DURING THE PERIOD SEK 3,058.1 million (2,333.9). • On 16 February 2017, CLX acquired Xura Secure Communications GmbH, one of the leading mobile messaging services providers in Germany, with a market share above 30 • Sales grew by 31 percent com- percent. pared to previous financial year. • CLX acquired Dialogue Group Ltd on 10 May 2017. At the time of the acquisition, Dia- EBITDA amounted to SEK 263.2 • logue Group was one of CLX’s biggest competitors, particularly in Australia and the UK. million (161.9). Through the acquisition, CLX has reinforced its market-leading position in the mobile • Adjusted EBITDA amounted to cloud communications market. SEK 296.7 million (238.0). SIGNIFICANT EVENTS AFTER THE END OF THE PERIOD • EBIT amounted to SEK 124.9 • On 27 March 2018, CLX acquired Unwired Communication ApS, based in Copenha- million (112.5). gen, Denmark and with about 20 employees. The company is a leading vendor of cloud • Profit for the year amounted to communications and messaging services to the Nordic financial sector. The purchase SEK 134.4 million (111.6). consideration was DKK 148 million on a cash- and debt-free basis. The acquisition was • Diluted earnings per share were financed with expanded credit facilities of DKK 100 million and cash reserves. SEK 2.58 (2.55). • On 4 April 2018, CLX acquired Vehicle Agency LLC (Vehicle) based in Seattle US with about 10 employees. The company is specialized in technology and solutions for individ- ualized video- and content rich media communication solutions. The purchase price was SEK 8 million on a cash- and debt-free basis with a possible earnout of USD 4 million. The acquisition was financed with own cash. • On 18 April 2018, it was announced that the board of CLX has appointed Oscar Werner as new president and CEO of CLX Communications. He will assume his position on 1 Sep- tember 2018. Johan Hedberg will take on a new role as Corporate Development Manager and remain in the Group Management team.

NET SALES, SEKM EBITDA, SEKM

3,500 3,058 300 263 3,000 250 2,334 2,500 200 2,000 162 150 1,500 93 844 100 78 1,000 606

500 50

0 0 2013/14 2014/15 2015/16* 2017 2013/14 2014/15 2015/16* 2017

KEY FINANCIAL DATA 2017 2015/16* MSEK 12 MON 18 MON Net sales 3,058.1 2,333.9 Gross profit 780.0 642.3 Gross margin 25.5% 27.5% EBITDA 263.2 161.9 EBITDA margin 8.6% 6.9% EBIT 124.9 112.5 EBIT margin 4.1% 4.8% Profit for the year 134.4 111.6 Diluted earnings per share, SEK 2.58 2.55 Cash flow from operating activities 51.3 107.6 Net debt 348.8 368.6 Debt/EBITDA ratio, multiple 1.3 2.3 Definitions are provided on page 34. *1 July 2015 to 31 December 2016 was an extended financial year of 18 months due to the change of CLX’s financial year to coincide with the calendar year as of 1 January 2017.

3 CLX COMMUNICATIONS ANNUAL REPORT 2017 CONTENTS

2 CLX in brief 30 Parent company company 5 CLX across the globe statement of changes in equity 6 Message from the CEO 31 Parent company cash flow statement 8 Market 32 Multi-year review, Consolidated 10 Strategy 34 Definitions 14 Employees 36 Notes 16 Management report 64 Certification and signatures 24 Consolidated income statement 65 Auditor's report 25 Consolidated balance sheet 69 Corporate governance report 26 Consolidated statement of changes in equity 74 Board of directors and Group management 27 Consolidated cash flow statement 78 Sustainability report 28 Parent company income 85 Annual general meeting, statement addresses, definitions and acronyms 29 Parent company balance sheet

4 CLX COMMUNICATIONS ANNUAL REPORT 2017 HQ STOCKHOLM, SWEDEN 3,058 SEKM 3,873 SEKM 300+ 30+ 50,000+ SALES IN 2017 MARKET CAP EMPLOYEES OFFICES DEVELOPERS

Stockholm Gotheneburg Kalmar Lund Köpenhamn* Sheffield London Warsaw Canterbury Dortmund Prag Kiev Paris Munich

Madrid Istanbul

Seattle Montreal San Francisco New York Dallas Atlanta Bagdad Miami Dubai Guatemala City Bangalore Kuala Lumpur Bogotá Singapore Quito

Lima

Sydney Melbourne

CLX was founded on a vision to become the world’s largest and leading provider in the mobile cloud communications market. With the two acquisitions last year of Xura Secure Communications GmbH and Dialogue Group Ltd, we reinforced our position as a global leader in cloud communications.”

- Johan Hedberg, CEO CLX Communications AB (publ)

* From March 2018

5 5 CLX CLX COMMUNICATIONS COMMUNICATIONS ANNUAL ANNUAL REPORT REPORT 2017 2017 MESSAGE FROM THE CEO FROM REGIONAL PRIVATE ENTERPRISE TO GLOBAL PUBLICLY TRADED COMPANY

We continued our international expansion in the first half of 2017 through the acqui- 2017 was a year in which sitions of Xura in Germany and Dialogue, we focused on consolidat- which has presence in Australia and Asia. ing transaction systems In North America, eight of the ten largest and migrating clients from American tech firms are now CLX cus- acquired companies to a tomers. Several of these customers were corporate technical plat- brought on board in 2017 and will have form, Nova, to achieve syn- impact on our revenues by mid-year or in ergy gains and strengthen the second half of 2018. Organic growth declined in 2017, our position going forward. partly because the acquired entities did Since the IPO in 2015, CLX not have the same growth rate and partly has grown sales from SEK because organizational focus during 2017 844 million to SEK 3,058 was on integration. However, organic million while maintaining expansion in North America continued profitability. In 2018 and and we will be able to further step up the forward, we will further wid- pace in 2018 based on the strong position en our product and service CLX has achieved in the market. portfolio while continuing to In addition to most of the leading global consolidate the A2P messag- tech firms, some of the world’s biggest ing market until we achieve and most demanding companies in our vision to become the banking, financial services, aviation, and healthcare use our services every day. world’s leading provider in In 2017, we handled 18 billion transac- the mobile cloud communi- tions: nearly four messages on average cations market. to every mobile phone in the world. Our capacity to deliver elegant, innovative solutions to complex challenges is critical to the trust we have been given. The ability to offer high security and premium quality in the delivery of enterprise communications to their customers - wherever in the world they happen to be - is essential in the rapidly digitalized economy. Our network of direct connections to mobile operators, which make it possible for our customers to reach more than five billion mobile device users across the globe is the foundation of our offering. Quite simply, we have the biggest and most sophisticated messaging services network in the world. Our new platform, Nova, has been deployed and migration of the customers

6 CLX COMMUNICATIONS ANNUAL REPORT 2017 MESSAGE FROM THE CEO

CLX's vision is to become a leading provider in the rapidly growing global market for cloud communication solutions in messaging, voice and video communications services and for IoT - Internet of Things.

of acquired companies will be succes- DRIVERS OF SUSTAINED 2018 AND BEYOND… sively completed in the second and third GROWTH CLX's sales have more than tripled since quarters of 2018. With a fully operation- There are several strong arguments indi- the IPO in October 2015, without compro- al Nova, we will be even more efficient cating that we have only seen the begin- mising profitability or quality. Our financial and will create a strong and cost-effective ning of our growth journey: position is stable, giving us the opportuni- base for continued market consolidation. • The market is growing and the A2P ty for sustained growth. We have a strong 2017 was a stable year for the Operator (Application to Person) communica- and growing customer base that includes Division. An unusually high number tions market is still in its infancy. The some of the biggest and most exciting of major capacity expansion projects market is still growing as large, global companies in the world, which are rapid- contributed to outstanding profitability. enterprises integrate communications ly adopting new communications technol- We are continuing to invest in developing solutions with their business support ogies in the digitalized world. cloud solutions for mobile network oper- systems. Being the CEO of CLX Communica- ators. The Operator Division also won • Cloud solutions are gaining ground tions has been both demanding and very several awards during the year in the area and are increasingly going to become enjoyable. Demanding because we do of security software for mobile operators. the primary alternative when enter- business in a rapidly changing market. I am looking forward to the next few prises replace or build communica- Enjoyable because I have the best col- years with great optimism as the Opera- tions solutions. CLX's offering includes leagues I could have ever wished for in tor Division’s offering evolves from tradi- cloud-based interfaces for messag- terms of their industry expertise, innova- tional software license sales to solutions ing, voice, video and data services that tiveness and skill at translating brilliant based on not only developing, but also allow enterprises to easily integrate ideas into sales, growth and profitability. managing, ongoing operation of mobile communications services with their When I look back at 2017, I see a com- operators’ business-critical systems. core systems in a cost-effective, scal- pany that continued to grow rapidly, able and flexible way. organically and through acquisitions, and MARKET TRENDS • New technical solutions. Innovation has now taken a position as a global pro- Suppliers of Communications Platform as and development are among the hall- vider of cloud communications services. a Service (CPaaS) are making it possi- marks of the communications market. For this, my sincere thanks to my talent- ble for businesses and organizations to CLX is deeply involved in developed and driven colleagues, our customers integrate real-time communications in ing the standards and services of the and the company's shareholders. Now is the form of messaging, voice and video future. RCS (Rich Communication Ser- the time to hand over, and my succes- services with their business applications. vices) will be launched in 2018. Offering sor Oscar Werner has the experience and In an increasingly digitalized world of a richer user experience and advanced competence needed to take the compa- rapid-fire innovation, enterprises must interactivity, which enables more user ny forward on this journey. I look forward adapt to new technology to remain rel- cases and increasing message vol- to see the next chapter be written in the evant to consumers. Consumers do not umes, RCS is regarded by many as story of the small company from Kalmar want to download and learn how to use “SMS 2.0.” that in ten years has grown into a global more apps, they want more features built • Size and scalability. We have now market leader. into the apps they already use. By using reached a critical mass that in our CPaaS services, enterprises can easily assessment gives us lower transaction Stockholm, 27 April 2018 integrate communications into their apps costs than most of our competitors and in order to enhance the customer experi- thus cost and competitive advantages. Johan Hedberg ence and create new sales opportunities Our business model is still scalable and President and CEO or streamline internal processes. we have the muscle to be active in the What we have seen so far is only the continued consolidation of the market. beginning of an accelerating evolution. In These factors, combined with a solid order to successfully compete, enterpris- financial position and an experienced, es must create user-friendly services that innovative and growth-oriented organi- give customers the opportunity to acquire zation, put us in a strong position ahead and receive information or buy products as we move into the next coming years. and services via mobile platforms.

7 CLX COMMUNICATIONS ANNUAL REPORT 2017 96% plan to continue using CLX services 94% consider CLX a reliable partner

*CLX Customer Survey

THE MARKET A SWIFTLY CHANGING GLOBAL MARKET

More recently, those communications The same web developers that create, needs are increasingly being managed for example, an e-commerce site or a The market for enterprise by external service providers, that cater booking system can now also ensure that communications is going to customers of all sizes based on an their system can communicate seamlessly through a period of rapid increasingly wide array of easily accessi- and automatically with the customers via a evolution. Enterprise com- ble services. Using these service provid- variety of mobile first channels. munications is shifting from ers allows enterprises and organizations Typical examples are check-in messag- traditional telecommuni- to deploy new and innovative customer es for airline flights, log-in verifications cation solutions to internet services rapidly and cost-efficiently. using automated voice calls, or video chat applications. Previously, most Instead of having to have communica- functionality for support centers. Apart tions software and hardware internally, from being simpler to implement, this enterprises and organiza- enterprises now increasingly connect to cloud-based communications model also tions had to buy or build the service providers’ cloud-based, stan- requires minimal upfront investments. complex in-house commu- dardized APIs (Application Programming Rather, it is a pay-as-you-go model, nications solutions, be it Interfaces), thereby creating sophisticat- where the buyer only pays for the ser- call-centers, messaging solu- ed communications channels for their vices used. Finally, it is agile and can be tions, or e-mail applications, back-end systems, such as airline book- easily adapted to changing market condi- to communicate with their ing systems, without the need for any tions, by adding and removing services as customers. in-house communications technology needed, embracing new business mod- expertise. els, or new technologies.

8 CLX COMMUNICATIONS ANNUAL REPORT 2017 THE MARKET

FAST TIME TO ONLINE GLOBAL MARKET

EXCEPTIONAL ROI FOR 24/7 SUPPORT PAY AS YOU CUSTOMERS

LEVERAGING OTHER EASY TO INTEGRATE SECURE CLOUD TECHNOLOGIES

The providers of these cloud-based API’s (Application Programming Inter- show solid growth for years to come. communications services come from faces, standardized interfaces that allows Juniper Research estimates that in 2017, different backgrounds. Some have their simple access to the underlying software the value of the CPaaS market grew by roots in telecommunications while others functionality) and as such the buyer 50 percent to more than USD 1.6 bil- started out as pure SaaS developers. no longer needs to have any in-house lion from USD 1.1 billion in 2016. Juni- Some started out in messaging, while hardware, dedicated communications per predicts the total market size will rise others have deep voice expertise. How- capacity or deep telecoms expertise to to USD 6.7 billion by 2022 representing ever, most of them are gravitating towards communicate with their customers. The a yearly growth of 35 percent. Gartner the nascent market for Communications CPaaS providers manage all the telecom estimated the size of the CPaaS mar- Platform as a Service, CPaaS. network connections (both technically ket to be USD 618 million in 2016 and CPaaS simply means that communica- and commercially), and all the software forecasts a yearly growth of 50 percent tions are being provided as a complete and hardware needed to run these reaching USD 4.63 billion by 2021. Video service, including voice, video, messag- communications services. services are estimated to grow even fast- ing, and data, all accessible by open The CPaaS market is projected to er, driven by for example cloud-based health care services.

SIZE OF THE VIDEO MARKET - A MAJOR OPPORTUNITY

9,000 8,270 CPaaS 9x Communications The global video CPaas market 8,000 B2C is going to grow from USD 103 Forecast, USDm million in 2016 to 2.06 USD billion 7,000 Education, social and media in 2021 6,000 That entails 82% growth and will be 5,000 24% of the total market in 2021 (IDC) 39% 3,355 4,000 If you spent any

3,000 time at CES 2017 like I 2,060 VPaaS 19.4x 38% 2,000 did, this would be 1,585 evident that everything 1,000 798 406 103 208 23% is becoming video 0 2016 2017 2018 2019 2020 2021 enabled.” Comm Edu Visa CPaaS Patrick Moorhead, Forbes VPaaS

9 CLX COMMUNICATIONS ANNUAL REPORT 2017 CLX help operators to protect and successfully utilize their networks"

STRATEGY A GLOBAL MARKET LEADER IN MOBILE ENTERPRISE COMMUNICATIONS

In addition to A2P messaging, CLX is existing operators market-leading func- adding complementary communication tionality within messaging, security and CLX's goal is to become the services to its portfolio, such as auto- in transforming their businesses to acces- leading global CPaaS player. mated voice-, video-, and IoT-solutions, sible digitally and in real time. They also Since inception in 2008, CLX while also increasing the services con- enable enterprises and organizations to has grown to become the tent in the A2P messaging applications, become mobile virtual network operators leading supplier of A2P (Ap- through RCS, Rich Communications Ser- quickly and with minimal upfront cost, i.e. plication to Person) messag- vices. These services are all offered as act as an operator towards their custom- ing services, enabling auto- purely cloud-based solutions, without any ers without having any of the technical mated messaging from for need for a customer to implement any expertise or infrastructure normally asso- hardware or software internally. ciated with being a telecom operator. This example log-in systems to In addition to being a CPaaS provid- is a very attractive option as the Internet consumers in Europe, North er, through its Enterprise Division, CLX of Things gradually gains ground, and for America and Asia. also offers software and services aimed examples, car manufacturers are looking at telecom operators, through its Oper- for efficient ways to ensure their cars are ator Division. The Operator Division, connected to the internet, without being at which operates under the brand name the mercy of existing telecom operators. Symsoft, has a strong market position The Operator Division offers a full-ser- globally and is regularly ranked a lead- vice concept, where enterprises buy the ing provider of core telecom systems, entire core MVNO-platform from CLX, as such as SMSCs, Charging Systems and a cloud based pay-as-you-go-service. Security solutions. These systems give

10 CLX COMMUNICATIONS ANNUAL REPORT 2017 STRATEGY

In 2017, more than 18 billion A2P messages were sent via CLX platform.

TIER 1 SUPER-NETWORK utes. CLX has an exceptional blue-chip CLX’s in-depth telecommunications The Group’s market-leading position is customer base, and can spread infra- experience is a necessary pre-requisite based on its extensive Tier 1 Super-net- structure and operational costs on more for success in the CPaaS market, new work, that gives it direct access to the transactions than most other CPaaS pro- software functionality is rapidly becom- world’s 300+ leading mobile network viders, which gives us a strong compet- ing a crucial competitive advantage. This operators (MNOs) and mobile virtual itive advantage and acts as a substan- is especially true in the area of reduc- network operators (MVNOs). By rout- tial hurdle to new market entrants. Even ing overall effort, cost and complexity of ing messages via the Internet directly to so, we believe in becoming even larger, enabling both customers and third-par- the mobile network where the recipient both by expanding within voice, video, ty developers to easily integrate CLX’s resides at the time, CLX can ensure high- and data, and by consolidating the A2P services within their products using Soft- er quality and a more timely and cost-ef- messaging market. At present, there are ware Development Kits (SDK’s), or create ficient delivery of communications than many sub-scale, national or regional A2P entirely new services leveraging ‘Quick competitors with a less extensive net- providers, with a bleak long-term outlook. Start’ assets. This is an area where CLX work. These are crucial competitive We continuously evaluate potential acqui- will continue to invest. advantages for CLX’s customers, as con- sition targets, in order to see whether they sumers expect for example, log-in verifi- would add interesting customers or indus- AUTOMATION cation messages to arrive within seconds try-specific functionality, while also being By fully integrating our network capabil- rather than minutes, irrespective of where well suited for moving their traffic over to ities into a easy to use, self help, online on the planet they happen to be. CLX’s transaction platform, thereby cre- offering for small to medium businesses Building the Tier 1 Super-network to its ating cost synergies. we can automate internal processes and present size has taken close to 10 years, significantly reduce the time, complex- and more operators are added monthly, EXPANDING SERVICES PORTFOLIO ity and cost of managing our customer in order to achieve higher quality, low- In addition to messaging services, CLX and network. Ensuring all products can est latency and better global coverage, is in the process of adding new commu- be managed by customers directly online without the need for unnecessary and nication channels to its offering, includ- will significantly streamline our opera- costly message routing between differ- ing voice, data, and video. The aim is to tions and reduce the cost to service our ent operators. be able to offer enterprises and organisa- customers further increasing our cost tions a full-service communications solu- leadership. SCALABILITY AND THE IMPOR- tion, based on the customers’ needs rath- TANCE OF SIZE er than type of communication channel. In 2017, more than 18 billion A2P mes- New functionality is also being developed, sages were sent through CLX’s platform, for example specific functionality tailored as well as millions of voice and video min- for different industry verticals. Although

11 CLX COMMUNICATIONS ANNUAL REPORT 2017 STRATEGY

SOME OF CLX'S OPERATOR CUSTOMERS

SOME OF CLX'S ENTERPRISE CUSTOMERS

12 CLX COMMUNICATIONS ANNUAL REPORT 2017 STRATEGY

OUR GROWTH STRATEGY In order to successfully execute on this The increasing volumes within the A2P CLX’s growth strategy is based on four growth strategy, CLX has built and oper- messaging product line create the founda- corner-stones: ates a highly efficient and scalable transaction for strong long-term profitability. Even • Direct sales to large enterprises and tion platform, that can handle substantially though gross margins are low in some, organizations, such as banks, airlines, more traffic than today. CLX also aims to primarily European, markets, gross profit internet service providers, social net- have the lowest operational cost per mes- per transaction is similar in all regions, and works, etc. This is achieved through a sage or voice/video minute in the industry. through large transaction volumes in com- dedicated and global enterprise sales Starting with the acquisition of Mblox, bination with low operational costs, the force, with in-depth industry vertical the Group has conducted a major upgrade market leaders will be able to show strong expertise. and expansion project of its A2P messag- operating profits. Within its Enterprise divi- • Online sales to small and medi- ing platform, adding new functionality and sion, CLX focuses primarily on two import- um-sized enterprises, based on a further increasing scalability and robust- ant operational measures; gross profit per highly automated and very scalable ness. Migration of the customer bases transaction, and operating profit as a share web-based platform. The online sales acquired during 2016 and 2017 to the of gross profit. A continuing increase in channel is also particularly well suited upgraded platform, Nova, is now under- operating profit to gross profit shows the for third-party developers, that want way and will be ready by mid-2018. At scalability of CLX’s A2P messaging model. to add communications capabilities to that point, Nova will be an excellent start- The continuing consolidation of the tra- their products and services, by taking ing point for further market consolidation, ditional A2P messaging market creates the advantage of CLX’s functionality-rich as new traffic can be added with very little foundation and the cash flow to invest in SDKs. incremental operational costs. new products and services, both horizon- • Sales of products and services under Geographically, the Group intends to tally (IP/video etcetera, voice, IoT), and the Symsoft brand name to telecom- further strengthen its market position with- vertically (software solutions based on munications operators going through a in A2P messaging in North America and the Nova, for example for different industry digital transformation and enterprises Asia through organic growth, both through verticals), through internal development, aiming to become MVNOs. direct and online sales. In the more mature and through acquistions. • Acquisitions, both in order to con- European markets, where CLX already is A leading global position in A2P mes- solidate the A2P messaging market, the market leader in all major markets, saging also creates the conditions for thereby achieving further economies more growth will come through acqui- succesful cross-sellíng of services to the of scale, and in order to add new tech- sitions of regional players with attrac- existing customer base, i.e. bundling dif- nologies, and strengthen the Group’s tive customer bases. In 2017, two such ferent services based on the functionality market position in other communication acquistions, of Dialogue Group Ltd and that customers need. For example, log-in channels. Even though CLX has an effi- of Xura Secure Communications GmbH, verification is usually achieved either by cient and innovative development func- were done. Both these acquisitions con- messaging or by automated voice calls, tion, new functionality can often best be tributed substantially to CLX’s growth and and CLX aims to offer customers inte- acquired from smaller software ven- profit, solidified the Group’s market posi- grated service packages that seamlessly dors, that have specialized in certain tion in Germany, the UK and Australia, and includes the best of either communication areas. CLX is evaluating such oppor- added strong bridgeheads in markets such channel depending on a number of factors. tunities on an on-going basis. as Pakistan, Malaysia, and Egypt.

13 CLX COMMUNICATIONS ANNUAL REPORT 2017 EMPLOYEES

WE CONNECT PEOPLE AND THINGS FOR A WORLD OF UNIMAGINED OPPORTUNITIES

In order to develop and further develop For us at CLX, it is important to listen the optimal solutions for our clients, we and learn. That is why we have a non-hi- We offer solutions on the at CLX must challenge each other, inspire erarchical, flat organization in which we leading edge of technolo- each other and have fun together. That avoid office politics and work together gy that connect people and is fundamental. And that is why we are instead. Being open-minded and accept- things. This is opening the always looking for people of outstanding ing are vital character traits that shape a door to masses of new op- expertise whom we believe complement good team. Because, in the end, we are portunities - but our moth- and fit into our teams. all working towards a single objective - to erlode of innovation is only a Being able to balance professional- become the biggest and the best provider of cloud communications services. small part of the CLX equa- ism, self-distance, passion, coffee-main- lining, hard work and the ability to have a The capacity to listen and learn tion. Our employees are at good time together is also important That works hand-in-hand with the ability to least an equally important is why we have formulated our values - empower each other. That is why we part of the equation, perhaps which we always try to live up to. They arrange regular sessions at CLX, where the most important part of are provided a bit further down the page, we share our knowledge and experience. all. but first, we have tried to explain what In this way, we enhance our creativity we mean and how they work together. In and that also helps us grow together in a other words, what do they actually mean? global network.

14 CLX COMMUNICATIONS ANNUAL REPORT 2017 EMPLOYEES

CLX's employees are spread across people. So, there is no question that we COUNTRIES more than 20 countries and speak more should continue supporting charitable than 40 different languages combined. social projects like Hand in Hand, which is So, diversity comes naturally to us at working to increase woman-owned busi- 20+ CLX, and we take gender equality seri- ness, and Habitat for Humanity, which ously in an industry in which women are, supports the most deprived communities countries where unfortunately, hugely underrepresented. in the world by building houses for people the people of CLX are That is a change we are fighting for every who have never had homes of their own. working all over the world single day - and that is why we strive to This is a natural part of our values in order always have a woman candidate in every to embrace and drive change. new recruitment process, and for the can- As a whole, our values are driving us LANGUAGES didate to be interviewed by both a woman to become a continuously improved and and a man during the process. revitalized CLX - a CLX that is a trust- Our working approach is to be agile ed partner. A CLX that proactively offers 40 + and flexible, and we are always looking value-creating, cost-conscious solutions. different languages spoken one step ahead in order to drive change, We are a CLX that is focused on the regardless of whether that involves tech- customer experience and always seeks by the people of CLX nology or making a better world for more to exceed expectations.

As a whole, our values are driving us to become a continuously improved and revitalized CLX.

CLX COMPANY VALUES

OFFER A FIRST-CLASS BE COST-CONSCIOUS LISTEN AND LEARN CUSTOMER EXPERIENCE Be smart, act smart. Drive Be open, humble and Provide solutions pro- value creation with a cul- learn to continuously actively, always exceed ture of thriftiness. improve. customer expectations.

EMBRACE AND DRIVE A GLOBAL NETWORK EMPOWER OTHERS CHANGE Think big and act local. We Share knowledge and Be agile, flexible and act are part of a global ecosys- give guidance to feed fast. Think ahead and tem. creativity. We grow and drive change. succeed together.

15 CLX COMMUNICATIONS ANNUAL REPORT 2017 MANAGEMENT REPORT

MANAGEMENT REPORT

SIGNIFICANT EVENTS DURING THE FINANCIAL YEAR

The board of directors and chief executive Acquisition of Xura The acquisition of 100 percent of the share capital in Xura officer of CLX Communications AB (publ), Secure Communications GmbH (Xura) was finalized on 16 company registration number 556882-8908, February 2017 and Xura was included in the consolidated fi- herewith submit the annual report and con- nancial statements from that date. solidated financial statements for the opera- Xura is based in Munich and had 16 employees at 31 Decem- ber 2016. Xura had net sales of EUR 25.6 million and EBITDA tions of the Group and the parent company of EUR 1.9 million in 2016. The purchase consideration was for the financial year beginning 1 January and EUR 14.7 million on a cash- and debt-free basis. Please refer ending 31 December 2017. Unless otherwise to Note 34 for further information about the acquisition of Xura. stated, amounts are reported in thousands of Acquisition of Dialogue Swedish kronor (SEKk). Terms such as "CLX," The acquisition of 100 percent of the share capital in Dialogue "the company," "the Group," and comparable Group Ltd (Dialogue) was finalized on 10 May 2017 and Dia- refer in all cases to the parent company, CLX logue was included in the consolidated financial statements Communications AB, and its subsidiaries. from that date. Dialogue is headquartered in Sheffield, UK and the company had 49 employees as of acquisition date. During the period BUSINESS AND ORGANIZATION of March 2016 to February 2017, Dialogue had net sales of CLX Communications AB was founded, under the name Seitse approximately GBP 36.7 million and EBITDA of approximately 1 Holding AB, on 1 February 2012 and has been listed on Nas- GBP 5.2 million. The purchase consideration was GBP 32.0 daq Stockholm since 8 October 2015. million on a cash- and debt-free basis. Please refer to Note 34 CLX is a leading vendor of cloud communications services for further information about the acquisition of Dialogue. and solutions for enterprises and mobile operators. Mobile communications services from CLX make it possible for enterprises Acquisition of minority in Caleo to communicate globally with people and connected devices, On 4 July 2017, CLX acquired the remaining 33 percent of swiftly, securely, and cost-effectively. CLX solutions enable the share capital in Caleo Technologies AB from the minority business critical communication worldwide via mobile messag- owners. Caleo develops software that CLX sells as part of its ing services (SMS), voice services, and mobile data services. offering to operators under the Symsoft brand. The CLX Enterprise Division provides enterprise cloud com- The purchase consideration was SEK 5.7 million and was munications services. CLX has agreements with leading glob- paid in cash. The purchase agreement includes two condi- al mobile operators that give enterprises access to five billion tional earnouts based on sales of the company’s license to mobile phone users worldwide. new customers. The anticipated outcome amounts to SEK 7.2 The CLX Operator Division develops software solutions for million and has been recognized as a liability. Please refer to mobile operators that make it possible for them to offer mod- Note 34 for further information about the acquisition of Caleo. ern communications services to consumers and businesses. CLX software is provided both as a product and as a service. Rights issue CLX offers a complete service platform to virtual mobile net- As authorized by the annual general meeting held 19 May work operators, which allows them to focus exclusively on 2017, a directed issue of 4,067,647 new shares was executed their value propositions and customer relationships. on 31 May at a subscription price of SEK120 per share. Sinch provides communications services developed in- The issue was carried out to reduce debt and strengthen house that are focused on voice and video applications for CLX’s capacity for future acquisitions. mobile devices. These include verification and anonymization The new issue raised SEK 488.1 million before issue costs services for mobile apps. of SEK 8.0 million after tax.

SUSTAINABILITY REPORT New financing In accordance with the Annual Accounts Act, Chapter 6, Sec- CLX increased its credit facilities by GBP 12.5 million to fi- tion 11, CLX has chosen to establish the statutory sustain- nance the acquisition of Xura and GBP 32.7 million to finance ability report separate from the annual report. The sustain- the acquisition of Dialogue. The loan of GBP 32.7 million was ability report can be found on pages 78-84 in this document. repaid in full in August 2017 with a portion of the proceeds of the rights issue executed in May. Please refer to Note 22 for

16 CLX COMMUNICATIONS ANNUAL REPORT 2017 MANAGEMENT REPORT

further information about repayment and interest terms and to previous financial year. The gross margin declined from conditions. 27.5 percent to 25.5 percent. The gross margin was affected factors including growth in Divestment of mobile payments business the French market, where the gross margin is lower, as well as The mobile payments business in Australia and New Zealand increased onward billing by an American operator. The com- was divested on 5 September 2017. Under the terms of the pany is still prioritizing growth to achieve global scale advan- agreement, CLX will receive a portion of the gross profits gen- tages on the customer and product sides. erated by the divested business for 36 months. The capital gain amounted to SEK 0.1 million. Operating profit The mobile payments business in the UK and Ireland was EBITDA grew during the 2017 financial year by 63 percent to divested on 11 October 2017. Under the terms of the agree- SEK 263.2 million (161,9) compared to previous financial year. ment, CLX will receive a portion of the gross profits generat- EBIT increased during the 2017 financial year by 11 percent to ed by the divested business for 36 months. The capital gain SEK 124.9 million (112.5) compared to previous financial year. amounted to SEK 3.2 million. Operating profit for 2017 includes acquisition costs, capital The mobile payments business was included in the acqui- gains, income from the adjusted earnout for Xura, impairment sition of Dialogue. Following the divestments, all mobile pay- of goodwill in Xura and integration and restructuring costs of ments operations have been discontinued. SEK 45.3 million net. The previous year’s operating profit included market listing costs and integration and restructuring costs of SEK 76.1 million net. Adjusted for these items, EBIT- CLX GROUP OVERVIEW DA amounted to SEK 296.7 million (238.0) and EBIT to SEK CLX GROUP 2017 2015/16 170.3 million (188.6). SEKM 12 MON 18 MON CHANGE

Net sales 3,058.1 2,333.9 31% Net financial expense Gross profit 780.0 642.3 21% Net financial expense amounted to SEK -50.5 million (8.9), Gross margin 25.5% 27.5% with interest costs amounting to SEK -17.9 million (-8.1) and EBITDA 263.2 161.9 63% foreign exchange differences to SEK -33.9 million (15.5). EBITDA margin 8.6% 6.9% Adjusted EBITDA 296.7 238.0 25% Tax Adjusted EBITDA margin 9.7% 10.2% Tax on year's profit amounted to SEK 60.0 million (-9.8), with EBIT 124.9 112.5 11% an effective tax rate of -80.0 percent (8.1). EBIT margin 4.1% 4.8% Tax for the year has been affected by lowered corporate tax rate in the United States from 34 percent to 21 percent Adjusted EBIT 170.3 188.6 -10% effective 1 January 2018. This gave a positive net effect on Adjusted EBIT margin 5.6% 8.1% deferred tax assets and deferred tax liability of SEK 40.8 mil- Profit for the year 134.4 111.6 20% lion. Additionally, SEK 46.0 million in previously non-capital- Cash flow from ized loss carryforwards were capitalized in the United King- operating activities 51.3 107.6 -52% dom. For further information of items affecting tax on profit Cash and cash equivalents 164.6 115.3 43% for the year, please see Note 11. Please see page 34 for a list and definitions of financial measurements defined or not defined under IFRS, as well as operating Profit for the year measurements. Consolidated gross profit increased during the 2017 financial year by 20 percent to SEK 134.4 million (111.6) compared to Net sales previous financial year. Consolidated net sales grew during the 2017 financial year by 31 percent to SEK 3,058.1 million (2,333.9) compared to Cash flow and liquidity previous financial year. Cash flow from operating activities amounted to SEK Growth during the year was primarily attributable to ac- 51.3 million (107.6). quired growth in the Enterprise Division. As the preceding Investments in intangible and property, plant and equipment financial year was an extended period of 18 months, organic amounted to SEK 30.2 million (34.0). The investments refer growth was negative. primarly to capitalized development expenditure of SEK 17.9 million (22.7) and hardware and equipment related to reloca- Gross profit tion of offices in Sweden and the United States. Consolidated gross profit rose during the 2017 financial At the end of the period, the Group had SEK 164.6 million year by 21 percent to SEK 780.0 million (642.3) compared in cash (115.3) and an unused overdraft facility of SEK 100 million (100).

17 CLX COMMUNICATIONS ANNUAL REPORT 2017 MANAGEMENT REPORT

ENTERPRISE DIVISION SINCH

ENTERPRISE DIVISION 2017 2016 2015/16 SINCH 2017 2015/16 SEKM 12 MON 12 MON 18 MON SEKM 12 MON 18 MON*

Net sales 2,847.1 1,658.7 2,080.8 Net sales 50.2 1.4 Gross profit 599.8 336.3 406.4 Gross profit 36.3 0.9 Gross margin 21.1% 20.3% 19.5% Gross margin 72.3% 62.8% EBITDA 287.8 151.7 173.6 EBITDA -19.2 0.6 EBITDA margin 10.1% 9.1% 8.3% EBITDA margin -38.3% 43.3%

*Sinch was acquired on 20 December 2016 and is included in the consoli- Net sales dated accounts from that date. The Enterprise Division delivered consistently good performance in 2017 and is experiencing powerful growth. Net sales Net sales increased by 72 percent to SEK 2,847.1 million (1,658.7) year- Net sales amounted to SEK 15.3 million (1.4). The develop- on-year. ment of the Sinch product portfolio is proceeding as planned, The Division has continued developing its A2P messaging with extended functionality and geographical reach. There is business, largely through the acquisitions of Xura Secure also significant focus on increased growth through cross-sell- Communications in Germany and Dialogue in the United King- ing between Sinch and other companies within CLX. dom, Australia and Asia. Profit Profit Gross profit amounted to SEK 36.3 million (0.9) and the gross Gross profit increased by 78 percent to SEK 599.8 million margin was to 72.3 percent (62.8). EBITDA amounted to SEK (336.3) year-on-year. The gross margin amounted to 21.1 -19.2 million (0.6). percent (20.3). EBITDA rose to SEK 287.8 million (151.7) year-on-year. The RESEARCH AND DEVELOPMENT EBITDA margin increased to 10.1 percent (9.1). CLX develops software within several parts of its operations. Main development occurs in the Operator Division, whose platform has been deployed by numerous mobile operators OPERATOR DIVISION worldwide. The platform is also the basis of the Enterprise Di- OPERATOR DIVISION 2017 2016 2015/16 vision's cloud communications service. Most development is SEKM 12 MON 12 MON 18 MON done in the Development Department in Stockholm and else- Net sales 168.7 163.8 260.9 where in Sweden, but also in Canada. Gross profit 144.0 147.4 235.6 Important development work in progress includes the IoT Gross margin 85.4% 90.0% 90.3% initiative and the corporate Nova platform. Development expenses are capitalized as specified in Note EBITDA 41.9 46.4 80.0 1 and are amortized over 3 years. Capitalized expenses, re- EBITDA margin 24.8% 28.3% 30.7% lating to own development work, during the year amounted to SEK 17.9 million (22.7). Net sales Expenses for research and development recognized during Net sales in the Operator Division increased by 3 percent to the year amount to SEK 51.1 million (66.8). SEK 168.7 million (163.8) year-on-year. The launch of the CLX Managed Service offering has at- tracted great interest from existing and potential customers. THE ENVIRONMENT Revenues from this business are of a recurring nature and CLX's core business - software development and manage- CLX has set a strategic objective to increase the share of re- ment of digital transactions - has very limited environmental curring revenues in the Operator Division. impact. CLX has impact on the environment mainly through travel and hardware operation and decommissioning. CLX Profit aims to minimize this impact by replacing travel with online Gross amounted to SEK 144.0 million (147.4) year-on-year. communications to the extent possible and by choosing the EBITDA amounted to SEK 41.9 million (46.4) year-on-year. mode of transport that has the least possible environmental The EBITDA margin was 24.8 percent (28.3). impact, such as train travel. The company also aspires to send outmoded hardware for recycling.

18 CLX COMMUNICATIONS ANNUAL REPORT 2017 MANAGEMENT REPORT

PENSIONS EMPLOYEES Pension benefits for the CEO and other senior management During the period, the Group employed an average of 340 personnel must reflect customary market terms, compared people (199). Women make up 20 percent of the workforce with that which generally applies to executives in comparable (17). The average age of the workforce is 40 (40). positions with other companies, and should normally be based The company applies a rigorous recruitment process and upon defined contribution pension plans. uses both its own networks and external expertise to attract talents. We select our employees with care and are proud to OTHER BENEFITS have some of the best and most experienced people in the Other employee benefits must consist primarily of health in- business working for us. Our business is dependent upon ev- surance and fitness/wellness programs. Other benefits may ery individual contributing and assuming responsibility for their also include generally accepted compensation in connection own work. It is critically important to recruit motivated employ- with employment or transfer abroad of a senior executive. ees with the potential to advance within the company. CLX has employees in five parts of the world and broad PAY DURING PERIOD OF NOTICE representation of employees of diverse background. CLX be- If the company terminates the CEO’s employment, the period lieves differences can generate competitive advantages. Mix- of notice shall be a maximum of six months. If the CEO re- ing diverse backgrounds, skills, experience, talents, qualifica- signs, the period of notice shall be six months. tions, and personalities in an inclusive organization helps us A period of notice applies between the company and other understand the needs of the entire market. senior management personnel of three to six months, whether The company will continue to grow and recruit within our the employee resigns or is terminated. growth areas and expand support functions where required.

Guidelines for compensation to senior management RISKS AND RISK MANAGEMENT personnel CLX is exposed to a number of risks that may impact the Compensation to the CEO and other senior management per- Group's business, earnings and financial position. CLX contin- sonnel must reflect CLX's need to recruit and motivate qualified uously evaluates, identifies, and manages the risks to which employees by means of compensation packages perceived as the company is exposed. The risks assessed as most material fair and competitive. The Board of Directors is empowered to to the company are described below. depart from the guidelines below if special reason exists. Risks attributable to the company, its operations Compensation consists of the following components: and the industry • Fixed base pay MACROECONOMIC FACTORS • Short- and long-term variable pay CLX does business in several markets around the world. As a • Pension benefits result, CLX is affected, like other companies, by general eco- • Other benefits nomic, financial, and political developments at the internation- • Pay during period of notice of termination or resignation al level. BASE PAY AND VARIABLE PAY DOWNTIME AND COMPARABLE Fixed pay must be market-based and reflect the employee's CLX relies on its technical systems and its infrastructure to position, qualifications, experience, and individual perfor- deliver services and solutions to its customers. The company's mance. Variable pay must be measured against predefined operations may be obstructed by damage or breakdowns in financial performance targets. Non-financial objectives may the company's technical systems, infrastructure, and software also be used to sharpen focus on achieving the Group's stra- and may be affected by faults in a customer's, mobile oper- tegic plans. Objectives must be specific, clear, measurable, ator's, or service supplier's network, system, infrastructure, subject to deadlines, and adopted by the board of directors. software, or hardware. This can cause loss of revenue as well Variable pay may not exceed 30 percent of fixed base pay. as existing and potential customers, which may have materi- Long-term variable pay may encompass share-related in- al adverse impact on CLX's business, earnings and financial centive programs. Each year, the board of directors evaluates position. whether a long-term share-related incentive program should be proposed to the annual general meeting. The purpose of TECHNICAL SHORTCOMINGS offering a share-related incentive program is to ensure that the The services and solutions that CLX delivers to its customers interests of senior executives coincide with those of the com- are complex by nature and may contain significant shortcom- pany's shareholders. Individual, long-term ownership among ings or faults. Any shortcomings in functionality or shortcom- key individuals can be expected to stimulate keener interest ings that cause interruptions in the availability of CLX's ser- in the business and its profitability, increase motivation, and vices and solutions, including user errors, may lead to loss of enhance the sense of belonging with the company.

19 CLX COMMUNICATIONS ANNUAL REPORT 2017 MANAGEMENT REPORT

or delayed market acceptance and usage of the company's equate or impaired by gaps or shortcomings. If any of the risks services and solutions. This may also lead to warranty claims, should come to pass, it could have material negative impact issuance of customer credits, or refund of prepaid charges for on CLX’s business, earnings and financial position. unused services, loss of customers, or reallocation of resourc- The organizations of acquired entities are integrated into es to development and customer service. Finally, such short- CLX's organization. Such integration may entail difficulties comings may damage CLX's reputation. caused for instance by differences in corporate culture. Un- certainty related to possible organizational changes may also STRATEGIC PARTNERSHIPS result in key individuals leaving the organization or to loss CLX's services and solutions are dependent upon third par- of customers. Integration processes are time-consuming for ties, mobile operators in particular. CLX relies on mobile op- management and often entail delays, meaning that CLX’s erators' telecommunications networks in order to provide con- management may not be able to allocate the time necessary nectivity in various regions and countries around the world. to manage CLX’s ongoing operations and focus on the issues If CLX does not successfully establish or maintain direct up- that arise in that context. If any of the risks should come to links to mobile operators, or if mobile operators terminate their pass, it could have material negative impact on CLX’s busi- agreements and relationships with CLX, CLX may not be able ness, earnings and financial position. to attract new customers, existing customers may experience interruptions in service deliveries, and the company's costs for DEPENDENCE UPON KEY INDIVIDUALS purchasing network capacity from its mobile operators may CLX is dependent upon management personnel and other key rise. These circumstances can have material impact on the individuals, including a skilled sales force and software develop- company's reputation and profitability and may cause serious ers with detailed knowledge about the company and the industry. adverse impact on CLX's business, earnings and financial position. PROJECT LOSSES A portion of CLX's sales are the result of projects carried out MARKET CHANGES at a fixed price. Revenues from fixed-price contracts are rec- The market for enterprise cloud communications is changing ognized with reference to the stage of completion. In order rapidly in pace with technical progress, the availability of new to ensure that CLX's projects are carried out efficiently and or alternative services, and changing customer requirements, within budget, the company relies on experts in project man- which may require significant investments in research and de- agement, in particular with regard to project pricing, time allo- velopment. The company is dependent upon its ability to adapt cation, and achieving optimal performance. In practice, poor to this rapidly changing market by improving the functionality project management and erroneous cost estimates may have and reliability of existing services and solutions through de- material adverse impact on CLX's business, earnings and fi- velopment, launch, and marketing of new functions, services, nancial position. solutions, and customizations to meet customer demands. CURRENCY RISKS INTELLECTUAL PROPERTY Currency risk refers to the risk that fluctuations in exchange CLX is dependent upon protection of its intellectual property rates will have adverse impact on CLX's cash flow, income such as copyright, brands, and trade secrets. Such protection statement, and balance sheet. The company's presentation is gained through legislation and agreements (primarily license currency is SEK. CLX is a global operation, which entails sig- and non-disclosure agreements) with customers, employees, nificant cash flows in currencies other than SEK. Thus, fluctu- partners, and other parties. However, measures CLX takes to ations in exchange rates may have material adverse impact protect its intellectual property could prove to be inadequate on CLX's business, earnings and financial position. Please and do not prevent competitors from copying or reverse engi- refer to Note 32 for further information. neering the company's services and solutions or independent- ly developing and marketing services that are comparable or TAX RISKS better than the company's. Furthermore, a third party might CLX operates through subsidiaries in several countries. In- successfully contest, object to, invalidate, or circumvent the tragroup transactions take place in accordance with CLX's intellectual property that the company uses in its business. internal pricing policy and in conformance with CLX's under- standing or interpretation of applicable tax law, taxation agree- ACQUISITIONS ments, other tax rules, and the requirements of relevant tax Acquisitions are executed in accordance with a uniform and authorities. CLX's tax position, with regard to the current and predefined corporate process in four documented phases: earlier years, may change due to a decision by a tax authority strategy, evaluation, execution and integration. or as a consequence of changes in laws, treaties, or other Due diligence is performed in the evaluation phase to identi- regulations. These decisions or changes, which may have ret- fy and review the risks associated with the acquired business. roactive effect, may cause material adverse impact on CLX's There is, however, risk that due dili