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Hi, everyone, and welcome to the Q1 earnings report. I'm Erik Jivmark, I'm the CEO of Sleep Cycle. With me today, I have our CFO, Per Andersson; and our Chief Commercial Officer, Peter Alsterberg, both of you will hear more from later.
All of us live with our smartphones. They are the key to access many things in life, your finances, your children's schedule, your work and communicating with your loved ones. They are the one piece of technology that are in the center of our life. Currently, there are almost 4 billion people using smartphones. That is our market. Those are our potential users. Our technology is your constant companion. And we're proud of our achievements so far. We have more than 3 billion nights of data collected, 1 million daily active users in 150 markets across the world. Our technology spans across iOS, Android and smartwatches, making us a global leader in sleep analysis. So we use that technology to help our users fall asleep easily with our coaching programs and sound library. We help our users wake up rested, thanks to our patented smartalarm. We help our users to analyze their sleep and provide insights to their sleep habits, and we use that data to coach them to better sleep.
So let's have a look at Q1. It was a positive subscription growth from last year. We managed to become more efficient in user acquisition. We saw continued ARPU growth despite less FX impact, positive mix changes and an upward trend from previous price increases. We had 13% revenue growth, which is an increased growth from previous periods, 11% adjusted for FX, meaning a better underlying growth and strong numbers that we haven't seen in a while. We have an EBIT margin of 22%, 31% adjusted for costs related to the reorganization and the office closure, good cost control and efficient user acquisition. Q1 was a stable quarter with a solid profitability, while we shaped the organization for increased revenue growth.
If we zoom in, the number of paying subscribers are up from last year. No change from Q4. We started Q1 good but saw a decline mainly related to less renewed users. So good growth in new users, but we suffer from the decline in new users from last year, which negatively impacts the number of users that are up for renewal this year in Q1. Revenues grew at a higher pace than previous quarters, mainly a result from accrued sales in the second half of 2023, we now start to see the impact from the user growth in last year.
During Q1, we implemented a new strategy focusing on 3 areas: one, user acquisition, we want to improve the upper funnel traffic. We want to be visible in more channels and expose Sleep Cycle to more potential users. We will leverage known tactics to build brand and awareness without spending marketing dollars. Secondly, user engagement. We will continue to invest in the product, work with conversion, increase engagement and thereby decreased churn. Thirdly, we're looking forward to add a new layer of revenues, monetizing data and the technology, and this is something that we will speak more about in the future. One and two are about doubling down on the core product. We are the market leader, and we will remain so. Also, to support this strategy, we have consolidated our team in Gothenburg to enable more cross-functional collaboration and also to reach efficiencies. We have also completed a few key hires, Peter Alsterberg, as our Chief Commercial Officer; Petter Hoglander as our Chief Product Officer; and Elisabeth Hedman, who will join us as the new CFO in June. With that, the leadership team is complete.
When sharing the strategy, we also presented our financial targets. We aim to double the revenues in midterm. We want to have around 25% EBIT on an annual basis and we left the dividend policy unchanged.
Now I will hand over to Peter, who will speak about his area of focus going forward. Peter?
Thank you, Erik. And I'm super excited to join Sleep Cycle from the beginning of this month, taking the role as a Chief Commercial Officer, driving some of the areas that Erik has mentioned when it comes to adding some incremental growth to the company. Three things that I will work with is working with partnerships and driving data monetization and also being more active when it comes to revenue management. And I'll do that using my experience having worked for about 20 years advising, supporting companies across the globe to find a way to sort of partner with them tailored to their needs.
So the first thing that I will step into is partnership. So what we will do there is to first take an assessment of the current partnerships that we have and find what works well and what can be improved. But we want to expand from there. And to do that, we are working upon putting in place a partner proposition and the strategy to start to build sort of the pipeline with partnerships going forward. When it comes to my experience of how we make that successful, there are a few things that I take into consideration.
One is to make sure that we always focus upon the value for our partners. We are a product company, but we need to tailor our product to fit into the mission and to the needs of the company that we work with. Also, I think it's crucial that we work with scalable partners. We are a small company, so we need to make the right bets, making sure that we put focus upon working with partners that we can scale along with to make sure that we move the needle on a global scale. Last but not least, we also need to be smart in making sure that we not put complexity into the partnerships being a small organization, we need to make sure that we find smart ways to work with our partners. So that gives you a little bit of teaser of what the partnership approach is all about.
With that said, I will hand it over to Per Andersson, our CFO.
Thank you, Peter. As part of our new strategy, we presented a few KPIs and our goals when it comes to the financial targets. So I will briefly give you an update on how we are trending against those KPIs. Starting with installs. The number of installs in the first quarter was stable compared to last year. The previous 3 to 4 years, we've seen a decline in installs with about 15% year-over-year decline. The stable development this quarter is really positive. We are now in a very good position to deploy initiatives to drive the upper funnel and to increase the number of installs as part of the strategy.
On conversion, we delivered a conversion rate install to premium subscription of 7% in the first quarter. Our target is 8%. We're close to our target, which is really good. We saw that when it comes to new user acquisition, which was really good and up in this quarter. And looking forward now, our focus is really to first increase the number of installs; secondly, to increase the conversion rate that will help us grow in the coming years. Retention, as Erik said before, we saw a decline in the number of users renewing their subscriptions in the first quarter. That was due to the low user intake we had last year. But looking at the renewal rate, it was really stable. We had a renewal rate of 46%, which is a good number, and it's a good number to build from when we want to prove that with about 2 to 3 percentage point as part of this new strategy.
Looking at our ARPU, we delivered an ARPU of SEK 276 in the first quarter. Last year, we had an ARPU of SEK 251 million. We've seen a continued growth of the ARPU. And what's really good in this quarter was that the growth was driven by price and it was driven by mix effect. Previously, we've seen ARPU growing from foreign exchange impact. We now take in users on about -- or above SEK 300 in average ARPU. And with the new initiatives to -- with revenue management, with how we can manage subscriptions and so on, we will -- we're targeting an ARPU of above SEK 300.
So going down to the financials for the first quarter. In general, we delivered quite strong growth. This time, it was a really strong underlying growth. We did that with also improving the margin despite additional costs for the reorganization that we conducted in the quarter. Revenues ended up at SEK 63.5 million, which was up 13% from last year. Adjusted for FX, the growth was 11.1%. In previous quarter, the FX adjusted growth has been around 5% to 6%, meaning that we almost doubled the growth now. The revenue growth is mainly driven by ARPU increases but also due to the subscription growth that we saw in the second half of 2023.
In the quarter, we didn't capitalize any expenses. Platform fees developed in line with revenues. We saw a slight increase in platform fees in this quarter, which is due to the change in mix, meaning that we have a stronger growth in new subscribers than in renewed subscribers, which affects the mix a little bit. OpEx was below last year, mainly a result of less marketing spending. Included in OpEx is also SEK 0.8 million in nonrecurring expenses related to the reorganization that we conducted in this first quarter and the termination of the Stockholm office. Last year, we had SEK 0.3 million in NRIs relating to the public offer.
Staff costs increased compared to last year, but included in those staff costs are SEK 5 million related to the reorganization. If we adjust for those SEK 5 million, we are at a considerable lower staff cost, which also reflects a small organization. EBIT and the EBIT margin improved from last year also including the additional cost for the reorganization. And when adjusting for the NRIs of SEK 5.8 million, we saw that EBIT grew significantly from last year, and we had an EBIT margin of 31%. And this really shows that we are able to grow revenues while also decreasing costs. We have become more efficient in user acquisition with less marketing spending. We have a small organization, which in total gives us a margin of above 30%. In the quarter, we delivered SEK 18 million in cash flow, and we held about SEK 150 million in cash at period end.
So with that, I will leave over to Erik for some final comments.
Thank you, Per. So to summarize, Q1 was job done. We developed a new strategy, which we shared with the market in end of March. We're getting our house in order. And we have shown that we are ready to take the necessary actions. I am pleased with having finalized leadership team changes, gathering the team in one place and successfully transitioned marketing to our external partner. So while we had a focus on operational changes, we kept a tight cost control and protecting our subscriber growth. I believe this speaks loudly about the discipline we have. And looking ahead, I feel positive about the things we're putting into work, helping us achieving our growth objectives. As I said before, I'm expecting to see the results of the new strategy during the second half of the year.
And with that, we are happy to take any questions you might have.
Yes, we have a question here. Could you comment on the size of the current organization after the merger of the Stockholm office and the Gothenburg office, is it correctly understood that the current headcount amounts to 29. And if so, is this a sustainable level?
We are a little bit higher than 29 currently. As I said on the Capital Market Day, we will hire when we see a need for it. We will not just bluntly hire to fill previous positions. We will start with -- I think Peter is a good example. We start with one person working with partnerships. And when we see the traction, then we will invest in additional resources to harvest those opportunities.
Could you please elaborate on the margin goal of 25% EBIT and what will drive the additional cost, which currently does not reflect the underlying profitability?
So as I said, we kept a very tight cost control on purpose. We are changing to an external marketing agency. We want to keep it tight until we see that we get the results that I expect once we see those results, then we are ready to use that margin to increase the spend and capture the growth. And the same goes I think in all the areas, if we see that we get good traction in partnerships, it might be that we'll be willing to invest to capture that growth. So the margin, the way I look upon it, is that we will use that extra money to be able to capture the growth when we see it. Until we see those opportunities, we will keep the tight cost control.
What was the amount on marketing spend in the quarter?
Yes. I mean we usually don't report on marketing spend, but it was significantly less than it was last year, the same period.
Have you seen any difference in the competitive landscape during the beginning of 2024?
No, not really anything I could point at. It is a crowded space, and we need to be aware of that, and we are aware of that. So we need to make sure that we move the strategy to execution because in the end, that's what will make us succeed. But I don't have any things that I want to point out specifically. We, of course, keep a tight eye on what competition is doing, but I feel we're in a good position.
Thank you. Then there's a question here from someone who missed the start of the conference call. Have you mentioned what other income, SEK 1.88 million in Q1 was? What was it?
Yes, the other income is mainly related to one of our partnerships that is not considered a subscription revenue.
Thank you. How are you working to boost user growth in the near term, let's say, 2 to 3 quarters? How does the outlook for more marketing look like? I know that you have mentioned improved efficiency, but do you see good ways to deploy a bit more. Is the space still crowded with venture capital money? This is one question.
Yes. Good question. I mean first of all, the way we capture growth is what we outlined in the strategy. And we haven't specifically called out marketing as a vehicle to move the needle. Instead, we have talked about the need to find brand partners, other partnerships with adjacent segments that we want to capture. We will continue to work with the product. I think we speak a lot about the commercial initiative, which I think is good, but we also need to remember we are a product company, and we are developing features. We are releasing features. We had a feature just a couple of weeks ago that got some attention from Apple, thanks to our good relationship. So we are also focusing on the product. When it comes to marketing, as I said, it's early days. We just transitioned during the quarter to the new outsource company. But it's a very straightforward calculation to do the CAC LTV. So if we see traction in marketing, then we will invest more in marketing.
I can just add a bit on that what we've done in this quarter. And as I explained previously, was that we've seen a flat development in installs coming from a decline for a period of over 3 years, actually. So some of the initiatives we have taken are actually paying off and we do that with less marketing spending actually. So I mean, one part of this new strategy has been to focus more on the upper funnel, driving traffic, improving the number of installs and so on. And we see some results from that already. So looking at it in the short term, I believe we have a few things we will do, and we have a road map for that.
You mentioned the product. Are there any new features in 2024 that you look forward to, which could potentially boost user growth and improve retention rates?
Not anything specifically that I want to share today, but I'm looking forward to come back with that. We have some really interesting ideas that we're working with. But let's come back to that when it's materialized a little bit more.
All right. There is another question regarding the product here. Any improvement in UX that have improved or may improve conversion rates?
We believe heavily that if we manage to improve the UX or even the information architecture, we will see increased engagement and lowering churn. So that's one of the areas that the team is currently focusing on. So we will have more to share about that in not too distant future.
Then there is a question on the pricing points. Have you started to test different pricing points and perhaps the subscription lengths in certain markets as well? Or will this happen in a few quarters' time when new key hires have settled in a bit?
Yes. I mean, Peter just arrived. We're very happy about that. But it takes maybe a couple of more weeks to get running. With that said, it's not that we just sit around and wait. The team are conducting different paywall tests. It's part of the daily work. But we will add another gear into that. And I think that will take a little while to make sure that we have the right tools in place to do so in an efficient manner.
Continuing on that topic a bit here, how are you going to reach out effectively to new partners? How do you find new gym passes in interesting markets?
Right. So what we are doing is now to sort of short list and long list the industries and the players within respective industries that we think is most relevant. And from then on, it's very much upon starting to build that funnel by starting to reach out and starting up dialogues.
And I can just add. I mean I know this since I've been here now for 6 months, we also have a lot of inbound requests. We are quite a big name in the industry. We've been around for a while. So we have a lot of inbound requests that maybe we necessarily didn't have the capacity to take care of before. Now we have that capacity. So it will be a combination of both the outbound and inbound.
Thank you. Then we have another question here. You mentioned in the report increased efficiency, for example, switching to working from the office at least 4 days per week and so on. Can you talk a bit about your reorganization of Sleep Cycle and what you hope to achieve now with both new key recruits but also the reshaping of the organization?
So first of all, what we're going to do it requires something difficult. I mean we're going to double the company in revenue in the medium term. So in my experience, if you want to do that efficiently, you need to know each other quite well. And to be able to have a good collaboration, cross-collaboration, I believe it helps that we see each other at the office. And that's the current policy that we are working after. Going forward, I mean, we will have more of an outcome focus, I would say. So we will be much better on steering on what we want to achieve and maybe less output focused. So what are the KPIs that we want to move.
And then we will see the results of the initiatives that we do. That will also help us to close things that doesn't work, I mean, to validate hypothesis earlier or to know when we had a success, what we actually did. And I can see that we, as a company and the team, we're really gathering around this. The key hires that are coming in, of course, comes with this experience. Petter, who is not with me today. It's a great product leader, has done tremendous things in the past, very much on the same notions as I just spoke about. And we also have Peter here, who also comes with a wealth of experience of how to organize and drive an efficient team.
Another question about the organization. What is the current headcount? It says from the report, the average number of employees in the group for the quarter, January to March was 37. 48 apprentice. Following the reorganization and closure of the Stockholm office, the employee count was 29.
So I can comment on that. By the end of the quarter, we were, as I said, 28 people employed. We have hired some new people now in April and May, and we will continue to hire both people to fill up for the people that left us after the reorganization, but also to fill some other positions. So I believe it's fair to look at the average number of the players over the year because it may vary between the periods. So as Erik said, we don't have a specific number that we aim for, but obviously, we look at being efficient when it comes to staffing.
I mean in the end, it's about -- we have the 25% of the EBIT. That's what we're aiming for, and we will do what -- the investments that we need to be able to reach the growth targets while protecting that 25% that we have guided. It could be that we hire people. It could be that we use the money for other things, but that's the commitment that we have given.
Yes. Then there's a question regarding the extra cost for the reorganizations. Should we expect any additional extra cost for reorganization? Or has everything been recognized in Q1?
Everything has been recognized in Q1.
Great. Then we have another question here. [Foreign Language]. What are your thoughts on platform costs? Is it possible to decrease them?
I mean they are what they are. We have also the benefits of what the platform does for us. I think sometimes we speak a lot about the fee and the fee structure. And of course, we always want to decrease the fees. But with that said, we also get a lot of benefits we can -- being a company of 30-ish people. We can sell in 150 markets and all the local rules and regulations, taxes, et cetera, are taken care of, we can reach a broad audience. So I see a lot of benefits with the platform. When it comes to the fee structure, well, I mean, short term, the only thing we could do is to increase engagement, which is also part of the strategy because the renewal fee is lower than when you have a new subscriber, which I think Per also mentioned as part of the cost when you went through the statement earlier.
Yes. And also by growing within partnerships, for instance, we find channels which is less expensive to grow within. But obviously, that requires some internal resources from our side.
Then we have the last and final question here. Between '21 Q4 and '23 Q4. Other income averaged less than SEK 200,000 per quarter. Is it correct to assume that the average level should be higher going forward driven by partnership?
That we can assume, yes.
Absolutely.
But just on that note, as I said in the previous question, we separate between subscription revenues and other revenues. But obviously, we sell the same product, but it's just a different way of recognizing the revenue. So I believe it should be seen as 2 separate revenue streams. And it should not be seen as other income is a proxy for partnerships, for instance. And going forward, we need to consider how we should report that when partnership grows. And then also when we might add other revenue streams coming from our new initiatives as well.
Thank you. That concludes the questions from the web.
Thank you very much for joining us today, and thank you.