Acast AB (publ)

STO:ACAST

Earnings Call Transcript 2022-Q4

[Unknown Executive]

Good morning, and warm welcome to the presentation of Acast's year-end report for 2022. Our CEO, Ross Adams; and our CFO, Emily Villatte will present the results and developments in the last quarter and the full year. [Operator Instructions] And now I would like to hand over to our CEO, Ross Adams.

[Ross Adams, executive]

Thank you. Hello, everyone, and thank you for taking the time to listen to our report for the last quarter of 2022. In case you're new to our calls, as you just heard, my name is Ross Adams and I'm the CEO of this wonderful business, Acast, based normally in New York. Our CFO, Emily Villatte and I will take you through the numbers and events for the past quarter.

2022 has been, and I use this word in all of its meanings, an interesting year for the podcast industry and the world generally. It started off positively with the medium continuing to grow at lightning speed. The macroeconomic headwinds strengthened through the events -- strengthened with the events like the war in Ukraine and rise in inflation, wreaking havoc on the world's economy. This impacted the industry too. Naturally, brands started to be more prudent with their spending.

Despite this, Acast has increased the number of shows on the platform, the number of listens to those podcasts and average advertiser spend during the year. The average marketing spend per advertiser increased by 46% compared to the year prior.

Taking a look at the final quarter of the year, we've seen positive development with good organic growth. In Q4, we saw revenues grow by 35% compared to 2021 with -- one second, sorry about this -- with a gross margin of 35%. Now, we've halved our losses since Q3. And even in a more challenging macro environment, we are moving towards profitability in 2024.

The gradually increased uncertainty in the outside world during the year has affected the advertising market also towards the end of the year, however, with some improvements in both Europe and North America.

During the fourth quarter, we saw a continued growth of programmatic ad sales, a more automated way of buying and selling media through the use of technology, real-time data and algorithms. And by the end of the year, programmatic sales accounted for 13% of our total revenues.

The cost reductions announced at the end of the summer are now completed, and we entered 2023 with a stable foundation to continue developing the company and create the most valuable podcast marketplace in the world. The path to profitability for Acast lies in a focused effort on our internal efficiency and cost controls, combined with healthy growth created through proactive investments in developing our advertising offering.

Looking at the full year, the net sales growth is 36% with a gross margin of 34%. The year has been characterized by increased uncertainty regarding the macroeconomic development, which has affected net sales growth compared to 2021. But again, both third and fourth quarters show that we're moving towards profitability.

During the fourth quarter -- I'll highlight several developments that show what we are doing to innovate and push the industry forward while advancing our own position in the market. Firstly, Amazon Music and Acast entered into an agreement to deliver ad-free podcast for Prime members and Amazon Music Unlimited subscribers. The agreement means that Amazon has purchased all the ad inventory across thousands of Acast podcasts.

Monetization in the podcasting space has diversified massively in recent years. This deal opens up an additional channel to increase revenue and improve our sell-through rates based on our large ad inventory of Acast's marketplace. We anticipate opening up more opportunities like this in the industry going forward.

Next, let's look at our strength in the U.S. And for those who aren't familiar, Podtrac is the leader in podcast measurement and provides advertisers with free monthly access to Podtrac verified reach and deliver information for top sales networks. For all 3 months in the last quarter, Acast placed at #2 in Podtrac's ranker for podcast sales network in the U.S. Now this industry data demonstrates that Acast is truly one of the leading players in a growing U.S. market.

Another clear marker of our strength is our dominance of rankers in both Sweden and the U.K. Poddindex is based on actual listening figures. And if you look at the snapshot taken recently, at any one time, we represent around 60% of the top commercial podcasts in Sweden. And this dominance is echoed in the U.K., too.

The Apple podcast charts are not based on listening figures, but provide a great proxy for the most popular podcast within that region. And as you can see here, our snapshot has us representing 70% of the top 10 podcasts in the U.K. and 50% -- or 56% of the top 50.

These levels of market share are a true validation, where the top podcasts in the World trust Acast and our revenue models. These numbers are reflected in Acast's market share of podcast advertising revenue.

In Sweden, we estimate our market share to be around 40% based on the data from IRM and the IAB who examined the Swedish market. Podcast advertising is steadily increasing in Sweden, but it's still only a very small part of the overall advertising market. And according to our own estimates and estimates from a previous market study by PwC, we are by a good margin the largest player when it comes to podcast advertising revenue within the U.K.

Helping advertisers find their audience accurately, contextually, authentically, safely and transparently will be absolutely vital to -- vital in podcast advertising as well as solutions to buy ads in an automated way through programmatic ads or self-serve. I touched briefly on our innovation a few minutes ago, and this innovation has not slowed when it comes to our advertising capabilities.

During Q4, we launched keyword targeting, allowing advertisers to match their brand with the most relevant conversations happening in individual podcast episodes through AI. And this means advertisers are able to target individual conversations in a podcast even if that podcast doesn't necessarily fall into the category of podcasts they'd usually spend against. This opens up a whole swathe of new opportunities for Acast and for our advertisers.

Contextual advertising is becoming a crucial tool in ensuring timely relevance and circumventing the death of the cookie. Keyword targeting is a part of our suite of winning contextual tech to match shows with advertisers in a scalable way, allowing us to sell even more across podcasts that are not yet monetized to their full potential.

Adding to this innovation in expanding advertising opportunities across our inventory of podcasts, for the first time ever in podcasting, advertisers can now leverage their own first-party data to target high-value audiences across the Acast marketplace.

Acast first-party data solution comes to market as advertisers continue to prepare the anticipated death of the cookie and restrictions on use of mobile identifiers, which will require them to rely on their own first-party data. And we've developed an industry-first identity graph tailored just for podcasting.

Through a combination of IP address as well as other unique listening consumption signals, the Acast identity graph enables advertisers to onboard their own first-party data and to find and match their high-valued audience segments across the Acast marketplace, creating new ways to target relevant audiences who consume podcasts.

And we also launched our self-serve advertising platform to allow any advertiser to start their own podcast ad campaign for just as little as $250. This removes the need for humans in the loop as advertisers can plan, book and measure their own campaigns all through our platform, thus increasing more passive revenue opportunities through both Acast and the podcasters on our platform, a truly scalable solution.

For Acast, it opens up yet another revenue channel where we are able to target a broader base of our podcast inventory and automate advertising sales even further. This is an important step in our strategy to become the #1 player in the podcasting industry.

And a few more words about programmatic. In recent years, there's been a shift towards programmatic ad sales in the podcast industry led by Acast. While programmatic podcast advertising still represents a small fraction of the overall spend against podcast advertising, it is expected to grow and we have seen this happen. As said earlier, programmatic sales accounted for 13% of our revenue at the end of the year.

The automated processes of programmatic benefit both advertiser and Acast, offering the advertiser a seamless, effective buying route, and Acast, increased sell-through rates without requiring the same increase in human-led sales efforts, key to creating operational leverage.

So where is the podcasting market right now? And what can we expect going into 2023? Well, it's clear that podcast medium still has massive room for growth. And in fact, over the next 3 years, it is estimated that the industry's revenue is expected to climb to $4 billion. And PwC estimates the global podcasting ad market will grow 15% next year with the U.S. growing by high single digits.

And we expect growth comparatives to be tougher in the first half of the year and then easing into the second half. Programmatic has remained the fastest growing advertising channel, and it has the potential to pick up pace quickly, pending further signs of a general ad market inflection.

Looking further into the development of podcast buying. With Acast now having not only programmatic pipes in place, but conversational targeting capabilities, including by keyword and a self-serve advertising platform, we now effectively have the building blocks for the ad words of podcasting.

While podcasting grows, we'll all be keeping a close eye on the economic climate, of course. And it's interesting time for any business at the moment, but we're confident that we'll come out of the other side stronger in a growth industry and maintain our position as the beating heart of the podcast ecosystem.

We are confident that our business model, where creators keep control of their IP, where they can distribute their show across all listening platforms and where we remain leading innovators is proving resilient.

I'll now hand over to Emily to talk you through our financial performance for the quarter in more detail. Emily.

[Emily Villatte, executive]

Thank you, Ross. All right. So let's have a look at the numbers for the quarter. First of all, listens grew by 22% compared to Q4 2021. And this growth has come with lighter effort than previously as part of our deliberate strategy to focus on monetizing our existing portfolio. But we still achieved 92,000 shows at the end of the quarter on the platform.

We can see these efforts on monetization evidenced in our average revenue per listener, ARPL, which grew to SEK 0.34, reflecting an increase in monetization of each listen. The increase in ARPL has been driven by increasing the amount of inventory sold or sell-through rate, a slightly higher ad load and a pricing strategy allowing for some flexibility. And the potential for ARPL to grow over time remains, and we will dig into that a bit deeper in a minute or 2.

Over to net sales. We were happy to see net sales growth rebound to 35% in Q4. And organic growth as well has -- was materially better than the prior quarter, coming in at 24%. Q4 is, per usual, the highest revenue quarter in the year due to ad market seasonality, and we were pleased with the results achieved.

Now, let's look a little closer at how the net sales have been built up for the full year. And for those who attended the Capital Markets Day, you will recall that our ad sales are built up by multiplying the number of listens on Acast shows with the number of available ad slots per listen, and this gives us our available inventory.

The sell-through rate represents the percentage of inventory sold, and multiplying the number of sold ads with the average price gives us our net sales from ads. So how do we do in 2022? Well, our listens grew by 38% overall in the year and our available inventory grew a little bit faster due to slight increase in available ad slots.

At the same time, our sell-through rate increased to 29%. And with this level of sell-through rate, we have actually allowed ourselves some flexibility in our pricing or CPM that you can see here, which reflects the current market conditions and which has been helpful in growing our overall revenues.

To conclude, our net sales grew by 36% in the year, whilst our average revenue per listen remained flat compared to the prior year at SEK 0.22. And when it comes to ARPL, our playbook remains the same for the future. In addition to growing our listens, increasing the sell-through rate as well as the potential for opening new ad slots provides opportunity to increase our average revenue per listen over time.

Okay. Now let's have a look at our segments and how they have performed in Q4. It was actually Europe that took the lead on growth in Q4 with 38% net sales increase despite the economic climate. The Europe profit contribution increased, whilst the contribution margin contracted slightly to 18%, still a good solid performance.

North America also saw a rebound compared to Q3 to deliver Q4 net sales growth of 28%, with Podchaser now contributing a full quarter, delivering 8% of that growth. The profit contribution saw a small decline compared to the same period last year. Other markets remained steady with 34% net sales growth and a marginal increase in the contribution profits.

Let's also have a look at how this growth in the different segments has developed during the year. And here, we can clearly see the strong start in North America. That quick reaction due to the macroeconomic climate mainly reflected in North America in Q3, and then a bounce back in Q4.

In Europe, we saw growth slightly affected by inflation fears already in Q1, Q2, which also affected Q3, whereas Q4 just posted the highest growth figure of all quarters. So in Europe, we're really ending the year on a high note. In other markets, we can see the macroeconomic context affecting Australia and New Zealand and other international markets in a more measured way throughout the year.

And I think the most notable point here is the fast movement in North American growth, triple digit at the start and then contracting through to Q3, but also how the business adapted at starting levels and cost line during this macroeconomic shift.

Now with our full year results ready for 2022, we also show the full year performance in our largest individual market, which for us is the U.K., U.S. and Sweden. And here U.K. and Sweden represent the most established markets. Here, we can see reported net sales growth in the range of 28% for the U.K., 34% in the U.S. and 31% in Sweden for the full year.

And when looking at the development for market profit contribution, in addition to delivering positive local profits or CBIT, the U.K. and Sweden were also profitable after allocation of global costs in 2022, the same story as in 2021.

The local losses in the U.S. were impacted by one-off costs related to podcaster guarantee payments in 2022. And all of these markets also absorbed a one-off costs related to redundancies in Q3 and Q4 of 2022. And the U.S. would have been much closer to local breakeven if discounting these one-off losses and redundancy costs.

All right. Let's leave the full year market results for now and move back to our review of the Q4 results and the gross margin. Concerning gross margin, there's not much news here. The gross margin remains steady at 35% as per the previous quarter. Other operating expenses include the first full quarter of Podchaser's operating expenses as well as SEK 11 million in items affecting comparability, mainly related to redundancies.

And I recall that the reduction in workforce of around 15% of Acast staff, ex Podchaser that was announced in Q3 was now concluded in Q4. And these workforce reductions will realize annualized cost savings of around SEK 77 million moving forward, and we'll start to see that underlying cost base come through in Q1 of 2023.

At the adjusted EBITDA level, we're taking tangible steps towards profitability. Adjusted EBITDA margin of negative 7% in Q4 of 2022 is an improvement compared to the negative 8% seen in the same quarter last year. Our EBITDA development is, of course, subject to the usual seasonality. But looking ahead, our path to profitability is also underpinned by the cost reductions we have concluded in Q4.

Looking at our cash position. Our operating cash flows were a negative SEK 12 million in Q4 and were impacted positively by working capital movements. I'll note as well here that the positive cash flows in Q4 of 2021 were unusually high. The total cash outflow in Q4 was SEK 38 million and the cash balance at the end of the year was a healthy SEK 868 million.

And if we were to replicate this quarter with no changes in revenues, no changes in cost or cash flows, the company runway would amount to 22 quarters. But clearly, our objective is to deliver positive profits at EBITDA level in 2024, so we are working, of course, to improve our profit line. But we're ending the year with a very healthy balance sheet.

And I'll just conclude on that note. Ross, take on.

[Ross Adams, executive]

Thank you, Emily. We're looking forward to publishing our first full ESG report with our annual report that is coming out on the 18th of April. So please do keep an eye out for that. We're also keen to share some early results with our self-serve launch and trials once these are concluded.

Now let's go to the Q&A. So if you do want to post a question, feel free to type them in the box below.

[Unknown Executive]

Great. Thank you. And our first couple of questions comes from [ Arete ] asking what have you seen happen to ad pricing during the quarter?

[Ross Adams, executive]

Emily, do you want to answer that one?

[Emily Villatte, executive]

Yes, sure. So as you saw in our breakdown of our net sales buildup, we have applied more pricing flexibility this year and in Q4 compared to previous quarters. I think it's also -- we've seen more pricing flexibility in North America compared to Europe, where pricing has been more stable. But having a relatively low sell-through rate has meant that this pricing flexibility for us has not impaired our ability to grow our revenues.

But absolutely, there's been more pricing flexibility related also to the position we are right now in the ad market cycle with more flexibility in North America compared to Europe.

[Unknown Executive]

Great. And second question from [ Arete ] is there has been news reporting a slowdown in new podcasts. Is this something you are seeing? And if so, what reasons do you attribute this to?

[Ross Adams, executive]

Yes, good question, Richard. I think if you think about when the podcast industry -- I mean, started a very long time ago -- but I think the technology more recently has enabled anyone to effectively start a podcast. It is hard to build an audience in podcasting if you compare it to other influencer mediums because we consider podcasting part of that kind of influencer set.

And whilst technology makes it easy to create podcasts, whilst we are seeing a slowdown of show creation per se, we're still seeing the audience listening to podcasting massively increase. So I don't necessarily feel that's going to be a huge trend. But listening audiences are still increasing. So inventory pools are still increasing as well. So -- and that's good for the podcast industry.

[Unknown Executive]

Great. Thank you. Our next questions come from Derek at ABG. What has your initial experience of the Amazon deal been like? And do you expect to strike similar such deals in the future? Can you give a ballpark figure on what the effect on Q4 was like?

[Ross Adams, executive]

Okay. Em, you can take the second part of the question. I think that's a fantastic deal for us. It's the first of that kind of deal in the industry, and we're very proud of that deal. Could it be repeated? Absolutely with other providers. We can't kind of say what conversations are happening around that. But yes, absolutely, that is a deal that can be repeated elsewhere if we were to negotiate it. Em, do you want to comment on the number side?

[Emily Villatte, executive]

Yes, sure. In terms of the monetary value of the Amazon deal, we're not going to comment on that. But public information around Amazon listenership in the U.S., for example, puts them at between 1% and 2% of overall listening. So it's not a material revenue line for us in the overall scheme of things, but everything counts and it definitely contributed a bit to our Q4 growth. So we were delighted with that. Everything counts.

[Unknown Executive]

Good. Another question from Derek at ABG. Gross margin was a tad lower compared to Q3. Can you give some flavor on the drivers? How have sponsorships, host trends developed compared to, for example, pre-produced ads?

[Emily Villatte, executive]

I think you're hitting the nail on the head there. Sponsorships have continued to develop well in this market. They have been a revenue line that has seen less fluctuation in this macroeconomic climate, whereas the ads revenue line has moved quicker. So we had a bigger contribution from ads, for example, at the start of the year compared to the end. So the product mix definitely plays in.

[Unknown Executive]

Good. We have questions from Emily at Barclays. How do you expect your 2023 growth to look relative to the 15% market growth that you referenced to?

[Emily Villatte, executive]

I think we have a history of beating the market growth. And I can recap the financial guidance that we have given of 40% to 45% growth over the period 2020 to 2025. Now that we have concluded 2022 and with a strong growth of -- organic growth of 69% in 2020, 74% in 2021 and then 26% in 2022, right now, we're averaging at 56% growth for the prior period.

And looking forward, if we were to achieve an average revenue growth of 30% moving forward, we would end up in the midrange of our financial guidance for organic growth for the full period. If we were to end up with 24% growth on average, we would end up in the lower range of our organic growth guidance. So I think we're still -- and the reason we won't give guidance on a year-by-year basis is that we need to take this cycle into account.

So near term, we anticipate our growth to be below our future average but towards the end of the cycle, it would be natural for that growth to pick up. And we have a track record of beating the overall market growth for Acast.

[Unknown Executive]

One more question from Emily at Barclays. What are the internal efficiencies and cost control measures that you are referring to? Can you quantify the size of this? What are the SEK 27 -- SEK 77 million headcount cost savings net of the headcount joining as part of the Podchaser acquisition?

[Emily Villatte, executive]

So Podchaser brought in 44 staff. And looking at our average cost per staff, you can easily calculate the contribution that Podchaser gained both in terms of cost line, you can also see the revenue line if you go to the back end of the report. So excluding the 44 staff addition from Podchaser, the SEK 77 million in underlying cost base reduction comes from the other Acast element.

The full underlying cost base, where we will see a full quarter of Podchaser's staff and a full quarter of underlying cost base for Acast will be seen in Q1. So that will be more visible as we conclude our Q1 report and put that to the market.

[Unknown Executive]

One more question from Emily. How do you explain the decline in profitability in the U.S. market, excluding one-off costs? Do you expect that to be profitable in 2023?

[Emily Villatte, executive]

I mean we don't give guidance on individual markets. I think we should anticipate us continuing to invest in the U.S. It's a growth market, and we saw in Q1 those fantastic growth figures from North America powered by the U.S. So I think we can continue to anticipate that we will invest in this market.

[Unknown Executive]

Okay. There are no further questions right now. So I'll hand back over to you then, Ross.

[Ross Adams, executive]

Great. Thank you, everyone. Please don't forget to follow us on investors.acast.com, of course, on our Acast blog or listen to our financial results as of course, podcast. If you want to receive company data, continue to receive to your inbox, please do subscribe to press releases, news and financial reports in our Investor Relations web. Thanks very much.