Acast AB (publ)

STO:ACAST

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the Acast webcast with teleconference Q1 2022. [Operator Instructions] Just to remind you, this conference call is being recorded. Today I'm pleased to present the CEO, Ross Adams; and CFO, Emily Villatte. Please go ahead with your meeting.

[Ross Adams, executive]

Hello, thanks for that and a warm welcome to our Q1 2022 earnings call. As always, it's great to have you all here and a big extra welcome, of course, anyone who is new to this. As said, my name is Ross Adams and I am Acast's CEO and I'm joined today by our brilliant CFO and Deputy CEO, Emily Villatte. Emily.

Okay. So before we kick into the numbers, I think it's worth reminding you all about the fundamentals of our core Acast strategy, especially for those of you who are new to this call. Podcasting is of course, a fragmented space and it can be difficult to get your head around who does what. But the key thing to understand here is that Acast plays the central role in hosting, distributing and monetizing content for creators globally. Our vision is built around the creator and the thriving creator economy. Acast is effectively a 2 sided marketplace servicing the 2 main stakeholders. Firstly, of course, that is the supply side which is the creator, in our case the podcaster who are at the center of all we do, and today we represent 47,000 creators and that number is growing all the time. In turn, we also have the demand side and this comprises of 2,400 growing advertisers that ran campaigns with Acast in the past year on those podcasts as well as the monetization of those podcasts directly from the now new increased number of monthly unique listens in our marketplace to 91 million uniques. Everything we do and build. This is for both sides of this marketplace, and it's our mission to enable podcasters of all sizes to find their valuable audience and make money from their craft.

This is why we make sure their content is distributed to absolutely anywhere and audiences able to listen and discover their show. And for brands we offer creative advertising solutions that reach the most targeted and passionate and engaged audience of affluent listeners driving maximum effectiveness and ROI for the advertiser, while always respecting the unique relationship and bond a podcaster has with their listener. These things are key and unique to Acast as a pure play podcasting infrastructure company, and an app independent marketplace. We are podcasting and nothing else, meaning we can really focus on extracting the maximum value out of the podcasting economy for creators and advertisers alike.

And finally, before we get into the results, this presentation will go a little deeper and spend some extra time on our advertiser value proposition. Okay. Time to look at how exactly we do that with some of our recent highlights and with Q1 now closed, Acast's position of strength remains very clear. However, it's important to acknowledge that all of this is against the backdrop of global changes. When it comes to the war in Ukraine our direct exposure to Ukraine and Russia is very limited when it comes to creators and advertisers. And of course, our thoughts primarily go to the people who are directly affected by the war.

But the macroeconomic situation has impacted market sentiment, and combined with rising interest rates and inflation. This does affect us, as advertisers tend to err on the side of caution during turbulent times. We're following developments here closely and reviewing every investment decision we make. So we can calibrate pace of investment in line with each market specific circumstance and pace of growth.

However, as a fast growing company, in a fast growing industry, we must continue to accelerate in markets where we continue to see a large upside. Okay. With that said Acast is still clearly in a position of strength. Let's take a look at some numbers. We delivered 51% net sales growth in Q1 with a stable gross margin of 36%. We also delivered an adjusted EBITDA margin, which sat at minus 23% in Q1.

Now let's take a look at the growth we’ve seen across our podcast portfolio. Continuing the greater momentum in Q4 2021, we recorded 1.2 billion listens for our network of podcasts this quarter; 44% higher than Q1 2021. The number of shows that are part of the network increase yet again to 47,000. As we added another 7,000 podcasts since Q4 2021. With all these shows coming onto the platform, we're even better positioned to monetize these extra growing impressions over time, which provides great upside for us moving forward.

As we showed last time if you measure Acast's reach and scale against key players in the U.S., taking data from Podtrac, you can see that we're neck and neck with [indiscernible] in terms of U.S. reach and global downloads. And we continue to dominate the Swedish and U.K. charts in terms of top shows and talent.

With that strong growth in the supply side of our marketplace, let's take a closer look at the demand side and how and why podcast advertising is such a powerful medium for us and the 2400 brands we work with. Firstly, podcast advertising has proven time and again to deliver tangible ROI for brands.

We recently completed a research study with Omnicom in the Nordics tracking 37 advertisers across 6 categories over a 3 year period and $200 million of ad spend spent across multiple mediums, including Acast of course, we were able to see that online audio is outperforming all other media categories in terms of return on advertising spending, both in the short and the long term.

Looking at short-term sales, online advertising gives back 4x on the ad spend to compare that with an average of 2.5 across all media categories. But more than that, in the long term, podcast advertising gives us 6x return on this aspect. So in other words, $1 invested in podcast advertising gives $4 back in the short term, $6 back in the long term in pure sales. So why is that? One core reason is that podcasting is, of course, an intimate and immersive experience.

Recent research we ran in the U.S. saw 61% of our listeners agree that their favorite podcasters feel like their friends. And another study we ran through [ Quanta Lake ] shows how podcasts are most associated with escapism and unwinding, relaxing as well as freedom curiosity and joy. Added to this is the fact that podcasts have listeners undivided attention. Research last year by Cumulus Media showed that podcast listening commands over 1.4x the amount of attention of both social media and music. Podcast listening is also highly intentional. Content is deliberately sought out on demand by the listener. The aforementioned study with Quanta Lake showed that 67% of podcast listeners specifically set aside time to listen to podcasts versus 45% for radio listeners listen to radio. Finally, we know that podcasts reach both mainstream and niche consumer passions. 73% of podcast listeners agree that there is a podcast available for all their interest according to our research in the U.S.

Whilst the Quanta Lake study showed that the main reasons people are listening to podcasts is they provide a wider range of interest and content, have more niche subject matters and give listeners control and choice over what they listen to compared to other mediums. Crucially, podcasting also has a low ad load compared to other advertised channels. Just 5% compared to other channels such as radio, TV, YouTube and the likes of social media. And these range between 15% and 25%. And this balance ensured podcast listeners are not only overly interrupted or turned off from this. So there is still huge upside in ad load within podcasts moving forward.

In turn, this leads to a very high ad acceptance from listeners of around 80% compared to just 35%, for example, for YouTube. And of course, the fact that it is a little more lean forward medium than any other social media consumption. All this translates to is a higher -- is higher CPMs for podcast advertising compared to other channels. The immersive accepted ad experience demands high prices and therefore, greater revenue for podcasters and of course, for Acast. Also the opportunity for brand recall and brand standout for podcasts are huge due to the lack of clutter. CPM levels have been relatively stable within podcasting for the past 5 years and a wide range of -- and have a wide range, of course, depending on the different ad formats that we run. And they can even go as high as $100 CPM based on all successes and reasons mentioned previously.

All of this healthy, immersive and rich experience truly delivers the ROI for brands I mentioned at the beginning. I've picked just one example here from many annual campaigns to illustrate this point today. So for the holiday season at the end of last year, buy now pay later provider Klarna wanted to raise brand awareness of its product amongst its key demographic, 25- to 54-year-old women in the U.S. One of the hero campaign elements here was sponsorships voiced by the hosts of a popular podcast Gee Thanks, Just Bought It. Let's hear an example.

[Presentation]

[Ross Adams, executive]

Such reads were part of a campaign, which also included native branded segments in the show too. Now at the end campaign analysis through One Pulse clearly showed the effectiveness of the sponsorship with a 10% uplift in brand favorability amongst the target audience and 100% uplift in the likelihood of the audience being Klarna first as a buy now pay later solution, proof that when we combine creativity with the effectiveness of podcast advertising brands see real and measurable returns.

With the effectiveness of our own approach to podcast advertising, let's look at the macro trends within the broader ad market, which supports our mission. Firstly, the recent new markets at U.S. Podcast Advertising Report for 2022 showed that U.S. podcast ad spending will surpass $2 billion next year and $3 billion by 2026. Validation of the broader industry sees the demand that we see ourselves at Acast. Programmatic advertising in podcasting continues to grow rapidly. The deal sizes are increasing, and it remains our fastest-growing buying channel with triple-digit growth.

Other mediums are recognizing that a walled garden approach, as we've mentioned countless times before is not necessarily the most successful or profitable for podcasters. Netflix announced in April that it was acknowledging the value of consumer choice, and will move to offer an ad fund [ model ] itself. Meanwhile, creators are recognizing the value of mass distribution of these gardens. And perhaps the most high profile in all this is the Obama's themselves recently announcing their leaving Spotify to see mass distribution for their podcasts across all listening platforms.

And finally, we see that listeners continue to crave creativity in advertising. Our recent Better Ads Research prove this. For example, 60% of general audio listeners said that they actively liked 3D podcast ads versus 47% liked traditional radio ads. Creativity will continue to drive the medium forward, which is why we are so focused on this at Acast.

Now for the first time and as part of our annual report, we have started to communicate our ESG strategy. I'd like to take a minute to highlight some of the focus areas that we are working on. Acast's vision is to build champion and supercharge a profitable, fair and sustainable open global ecosystem for podcasts. We therefore have placed ESG highly in our agenda as an international high-growth tech company, we're continuously striving to have a meaningful impact on the world through products and services we provide.

Firstly, when it comes to our social impact, our mission is to seek out and support storytellers giving their stories the audience they deserve. We believe the top podcast charts have underrepresented large sections of society, especially different ethnicities, people in the LGBTQ+ community, women and other groups. We actively seek out these creators and support the building of their podcasts, eventually growing these shows to become mainstream revenue driving hits, through things like free Acast master classes for underrepresented groups. Our podcaster teams are continuously monitoring new and established creators. Our internal work on diversity, equity and inclusion also very much remains in focus as it has been for some time.

When it comes to governance, open podcasting is the bedrock on which the entire podcast industry was built. It's an industry that allows content creators to share and monetize their work across all podcast apps and players, and we aim to be a sustainable medium to our listeners, which means that our podcast content needs to be valuable to them and create a good listening experience.

Being a sustainable business also includes delivering scalability, future profits and free cash flows as a prerequisite for Acast to continue creating value for stakeholders in the industry. When it comes to scalability, Acast reported for the first time in 2021, Acast's 2 largest markets, the U.K. and Sweden, became fully profitable.

Looking at our environmental impact, Acast is beginning to work this year to start measuring CO2, including the measurement of emissions internally and externally from listening to our podcasts, which is a key element for us to track. At present, we're undertaking a deep dive to update our ESG gap analysis and stakeholder interviews, and we will be reaching out to some of the investors in the process. And from 2021 onwards, we will provide a full ESG report.

Before we move on to the financials, I wanted to share one of many examples of how our teams are finding ways to have a positive impact. Listeners want to act on the messages they hear, which is obviously great. But that also comes with a lot of power. And of course, with great power incomes great responsibility. With the news of the war in Ukraine, the team in Sweden found themselves in a situation where they wanted to use that now because our platform can make a difference. They ended up working with the Red Cross, giving them pro bono sponsorships from 30 of our biggest Swedish podcasts as well as an Acast Recommends campaign, totaling 6.5 million impressions at a value of SEK 1.2 million. From idea to execution, believe it or not, this was all done within 1 week. It was an incredible team effort because we have the people, we have the voices and we have the power to make a difference.

[Presentation]

[Ross Adams, executive]

And now on to numbers with Emily.

[Emily Villatte, executive]

Thank you, Ross. So much work, good work going on, on the ESG front, very inspiring to see. So let's have a look at the numbers. We are clearly starting the year with some strong fundamentals. We are seeing listens grow by 44% compared to the same quarter last year. So the types of shows that we're attracting come with highly engaged listeners and higher levels of consumption. If we look at our average revenue per listen, ARPL, we've seen a modest increase to the SEK 0.24 compared to SEK 0.23 in the same quarter last year. But here, there is really future upside as we have locked in our listens and our ability to increase monetization over time will only increase. Ross spoke earlier about the low ad load that we are experiencing in podcast.

So moving on to net sales. Our net sales is showing a very robust 51% growth compared to Q1 2021. And it should be noted that all of our markets that underpin this growth are growing. I'll also note that we had a positive impact from FX and the organic growth in the quarter was 40%. If we have a closer look at our segments, it was North America that delivered the strongest growth trajectory in Q1, accelerating its growth actually compared to prior year and the quarter. So we delivered 107% growth in North America as we also continue to invest in this area of the business.

Advertiser sentiment did have an impact in Europe and net sales growth reached 35%. Other markets grew by 47%. This is mainly constituting our Australia and New Zealand business, for the time being. This segment turned a small contribution loss in Q1 2021 into a small contribution profit in Q1 of 2022, [ the world counts ]. All right, all segments also saw a positive impact from FX on net sales in the quarter.

When it comes to the gross margin, it continues to be stable, reflecting the similar product mix that we have seen in prior quarters. Looking at our operating -- our other operating expenses, these grew from SEK 116 million to SEK 186 million, and this was an investment heavy quarter. We have increased our cost through selective investments in both product development as well as sales and marketing. When we look at the geographical spread of our investments, we have focused on North America, and that has helped us achieve the 107% growth, which we are, of course, delighting in. Continued investments in product development with a focus on attracting podcast creators has also helped drive this influx of new podcasts with highly engaged listeners to our platform. Our sales and marketing costs are affected by the fact that we have deepened our collaboration with some of our podcast creators who act as ambassadors for our brand.

Now the pace of investment growth is expected to reduce in the second half of the year, and we are clearly keeping a very close eye on how the market develops to ensure that we can calibrate our investments in the right way. So looking at EBITDA, our adjusted EBITDA margin reached negative 23% in this investment heavy quarter. This compares to negative 17% in the same quarter last year. So with Q1 being investment heavy and our European advertisers taking a more measured approach, as they started this year, compared to prior year, balancing our investments will very much be in focus, moving forward. We anticipate that whilst we will see deliberate investments continue, the pace of investment growth will reduce and the effect will be seen more clearly in the second half of the year. Also in the second half of the year typically being stronger when it comes to advertiser demand. EBITDA margins tend to improve in H2, which you can also see has happened historically here on the right-hand side.

Moving on to cash flows. The cash flows for the quarter were primarily related to changes in working capital as well as our operating losses. And the changes in working capital included the impact of recoupable podcaster prepayments. I'm also just noting here that the EBITDA or adjusted EBITDA on the price line was a good proxy for our operating cash flows in this quarter.

So with that said, back to you, Ross.

[Ross Adams, executive]

Thank you, Emily. Let's take a look at some of our more recent and soon to come happenings at Acast. Our international expansion continues, and in March, we announced our launch in Spain. According to eMarketer, 30% of Internet users in Spain listened to podcast at least once per month. This, coupled with our success in Spanish language content in Mexico made it the natural next region for us. And in the coming weeks, we'll be announcing yet another new country.

We've also recently announced yet more high-profile creators joining Acast. One of the U.K.'s most recognizable footballers Peter Crouch brought his highly successful show out into the open ecosystem from the BBC. Whilst this meant having to encourage all of his existing listeners to resubscribe on their favorite listening app, he is already back to 2/3 of his audience size in just 5 episodes and are on track to surpass his previous total listening figures. Media brands like BuzzFeed, Studios and AdWeek also chose Acast as their podcast partners. Proof that we have -- we continue to attract a broad range of world-renowned names.

We've talked extensively about our proprietary Paid-for membership offering Acast+ before. And I'm so pleased to say that it continues to thrive and make tangible difference to our creators listenership and their revenue. Uptake of Acast+ amongst our podcasters has more than doubled in the last 2 months. Our longest-standing Acast+ shows are seeing overall listens to their content increase by as much as 3.5x in just 3 months, whilst average revenue growth for podcasters using Acast+ is an additional 30%.

In Q1, there was a 475% growth in the number of shows that have set up a tier with Acast+ since Q4. We're rolling out yet more product features. Soon podcasters will have the ability to export the e-mails of their Acast+ subscribers directly from their dashboards. They'll be able to upload episode level intros and [ ultra ] audio, further unlocking the ability for more dynamic content options and for both Acast+ creators to offer features like subscriber-only longer episodes. Both they and Acast will also gain access to even more first-party data. We'll be modifying the sign-up experience for listeners to gather, with their consent, more information, including gender and age to allow our podcasters and us to further understand their audiences.

The closure of our listening app continues according to our plan and set to be officially decommissioned by the end of the month to allow us to truly focus on delivering the best podcast hosting and advertising experiences for the supply and demand side of our marketplace. One such focus is enriching yet further our targeting capabilities for advertisers. Just last week, we continued to roll out our proprietary conversation targeting capabilities. New IAB category targeting allows advertisers to target individual conversations at an episode-level offering richer relevant -- relevance to listeners than ever before.

To give you a flavor of how this AI backed routine works, I asked the team to run some analysis on the major world trends. They showed that in April 2022, instances of podcast discussing COVID-19 were down 64% versus January 2022, whereas discussions around Ukraine were 4.89x more prevalent in March versus January. Whilst of course, these trends might not be especially surprising, I wanted to illustrate how our conversational targeting capabilities will allow advertisers to get granular about not just where they target to, but also how they can target away from certain conversations.

And finally, a note to reiterate, whilst Q1 was investment heavy, we are diligent in managing our cost line and deliver it in considering any investments. Thank you for listening, and I'm delighted to open the floor now to any questions you might have.

[Operator]

[Operator Instructions] We have the first question from Derek Laliberte from ABG.

[Derek Laliberte, analyst]

And I mean, you delivered a 40% organic growth in the quarter, which is, I suppose, quite impressive given the rough European ad markets here. But looking at your -- it's still nevertheless quite a bit below your 60% midterm target here. I mean looking for, have you made any assumptions about the ad market environment is in this target because I think 2020 and now 2022 show that the business is quite sensitive to the general macro environment.

[Ross Adams, executive]

I mean, the advertising market is cyclical, and we start seeing advertisers being more cautious considering the current market environment, mainly, of course, in Europe. But having said that, podcast listening has seen strong momentum. We've seen huge momentum in ad shows joining us. So future upside is there. But of course, we monitor this progress, but it's mainly within Europe, we've seen an effect.

[Derek Laliberte, analyst]

And on this current weaker demand, I mean, would you say that it's purely related to this asset amongst the advertisers, right? It's not related to any increase in competition in the markets, primarily in Europe.

[Ross Adams, executive]

No. We've kind of moved our position of strength. We're even stronger now. We're growing a lot quicker in terms of listens and in terms of shows that are joining us, but it is the macroeconomic situation that has impacted that market sentiment rather than anything to do with competition.

[Derek Laliberte, analyst]

And on -- I mean, looking forward there, I mean, have you seen any pick up in advertising demand in the second quarter within podcasting or what's the status there? Because I mean at this point, what's reasonable to expect for the remainder of the year basically?

[Emily Villatte, executive]

I mean I think it's too early to call what will happen for the full year. We have seen an impact mainly in Europe to date. We saw a slight acceleration of growth towards the end of the quarter, but the macroeconomic situation remains something that we monitor really closely. For us to get back to the pace that we saw in prior years, we would need an uptick and some tailwinds when it comes to advertiser sentiment in the second half of the year.

[Derek Laliberte, analyst]

And finally, on the U.S. front, I mean you delivered this really impressive growth and continued to do so in that market. And what could you say about sort of the sensitivity there? Because I understand that, that market has significant momentum and you're doing really well. But what sort of a similar decrease in overall advertising demand across channels have a meaningful impact there as well? Or do you think the market is so strong, so it would have less of an impact if that makes sense?

[Emily Villatte, executive]

Just looking at the relative sizes of our different segments. Europe is still the largest segment that we have followed by the Americas and then Other markets. So when the European advertisers have seen a slight slowdown that has impacted us during Q1. So just with the relative smaller business in North America, but picking up and picking up pace at a very healthy pace, having -- if North America were to be impacted in the future, it would have less of an impact on Acast given the relative size of these segments.

[Operator]

Next question from Dennis Berggren from Carnegie.

[Dennis Berggren, analyst]

Starting off with the gross margin development. What's your view on the current progression? I mean it's clearly stable and fairly in line with the development seen throughout 2021. But it's still slightly below the 37% target that you set out in relation to the IPO. Could you provide some more comments on this?

[Emily Villatte, executive]

Things that drive the gross margin are mainly our product mix. So the biggest driver of gross margin are the types of products that we sell. And if we sell more sponsorships like the one you heard, the example with Klarna, where the host produces and beats the ad itself. That drives the gross margin further towards 30% and the more ads pre-produced ads that we sell that we distribute, for example, programmatically across a set of different podcasts that drives gross margin. Also, of course, over time, we hope to see Acast+ contribute to our overall gross profit, but that is starting from a small base. So it will take time for that to have a meaningful impact. Typically, what we see in Q1 as well is not material, but that perhaps is a little bit more clear this time. That is when we have increased consumption but a lower sell-through rate where we sell a smaller percentage of our inventory, we incur some streaming costs for that increased consumption. It only has a small impact on our gross margin. But that is something that we've seen too in prior years as consumption goes up compared to Q4, but the advertising dollars tend to go down compared to Q4. So that's a Q1 specific gross margin nuance. Does that make sense, Dennis?

[Dennis Berggren, analyst]

It does. And then also quite clear that you continue to invest quite heavily. Can you provide some more insight on the split between, I mean, sales, marketing and developers. I mean, we saw quite a large increase in number of full time employees and full-time consultants as well. And then also, if you perhaps could give us an update on the number of FTEs that are based in the U.S. that are focused on the North American market.

[Emily Villatte, executive]

All right. I will have to come back to you on the exact number of employees in the U.S., but it includes both the employees that sit within our market organization, but also an increased number of employees that work on product and tech. And to your point, we've seen the cost line that has increased the fastest in this quarter compared to the same quarter last year, was product and tech. So -- and we have increased our staffing in the U.S. For example, focusing on our podcaster acquisition efforts, working closely together with the U.S.-based marketing teams. They are doing an amazing job, and they have, through our product the marketing efforts help drive that significant show growth and listens growth. But we've also -- as we've talked about in Q4, the time to hire sales staff is Q1, not Q4, because all of the good sellers are very busy selling in Q4. So we've had the opportunity and fortune to attract some fantastic talent in this first quarter, focusing on North America, focusing on product impact. And we've also seen a slight increase in our marketing spend, discretionary marketing spend to support our podcaster acquisition efforts. But I'll have to get back to you on the exact head count in the U.S.

[Dennis Berggren, analyst]

And then finally, would you be able to provide some comments with regards to the local profitability development? And also, I mean, more perhaps how to think about the profitability after allocation of the global cost because most of the costs are truly allocated to these global costs. And how much of this should be seen as, let's say, negative maintenance costs versus investment for future growth? And what I'm really looking for is how quickly do you think you will be able to shift to profitability if you would immediately reduce the heavy growth investments?

[Emily Villatte, executive]

I mean the way we look at profitability, is we have -- we guided at the time of the IPO, that was June 2021 that our profitability target was to reach EBITDA profits within 3 to 5 years. Having said that, of course, we are monitoring the market developments, and we are being very deliberate in any investments that we make to make sure that we deploy any investment in the right areas. And we will continue to do that moving forward. We have seen one time in the past, in 2020, where we saw a slowdown in growth. And at that point, we experienced 22% top line growth, and we took a breather when it came to our investments. Right now, we are sitting in between. So we're seeing some of our markets grow at pace. So North America growing at 107%, and we're seeing other areas experiencing a slower growth. So the opportunity and challenge for us is clearly to make sure that we balance and calibrate our investments and deploy them where we get the right ROI whilst, of course, managing our balance sheet, our cash flows...

[Operator]

We have no more questions for the moment. [Operator Instructions] Madam, sir, we have no more questions by phone. Back to you for the conclusion.

[Ross Adams, executive]

So yes, just to wrap up, a big thank you to everyone who has joined today and don't forget to follow us on investors.acast.com, on our blog, on our website, and this presentation will shortly be available as a podcast, of course. To search, Acast financial reporting where you get your podcasts. Thanks very much.