Sleep Cycle AB (publ)

STO:SLEEP

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to the Sleep Cycle Q2 presentation for 2023. [Operator Instructions] Now I will hand the conference over to CEO, Carl-Johan Hederoth; and CFO, Per Andersson. Please go ahead.

[Carl-Johan Hederoth, executive]

Thank you. Good morning, and thanks for joining us today. For today, in addition to comment on the quarterly results, I'm going to focus on 2 subjects. Firstly, we will be allocating some time to discuss the cost efficiency strategies implemented in May. And secondly, I'd like to address our current trend in total subscriber count as well as factor influencing it.

In May, we announced a set of measures to increase our operational efficiency and alignment to our current market climate. The program affected approximately 10 positions within Sleep Cycle as well as a reduced marketing spend. Per will dive deeper into what to expect from a financial perspective later on. But to me, this is about focus on our strength. That is our products and our users.

The cost reduction has a set of direct impact on the business. We are discontinuing direct selling to businesses. Instead, we are putting more emphasis on scalable wellness platforms such as Gympass and the like. We are downsizing our marketing spend, decreasing new investments and new channels going forward. However, in terms of marketing, it's important that we will continue to run our positive LTV/CAC campaigns where we will get a quick return on our spend.

I don't expect this cost reduction will have a significant effect on either our revenue or the overall number of subscribers going forward. What this means is that these measures enabled us to shift more attention towards new features and product development.

What I believe you should expect is a leaner, more efficient Sleep Cycle with more innovative features releases to our millions of users, driving high conversion and more subscribers going forward.

Secondly, subscriber growth. Compared to the same quarter last year, we're still seeing a decline in total number of subscribers, as we have seen in the last couple of quarters. However, during the year and with an emphasis on the last quarter, we have made several important steps towards bending that curve. And this initiative is starting to materialize as we're seeing small but important indicators that the decline in subs is starting to stabilize and even grow on a month-to-month basis.

Actually, while the number of subscribers is down on a quarterly basis compared to last year, during both May and June, we saw a growth in subscriber inflow year-over-year, leading to a net add of total subscribers in these 2 months. And this shift is a direct result of dedicated actions and initiatives commenced during the quarter, and I will get into more details on this later on in the call.

So next slide. I'll quickly run through the KPIs for the quarter. Subscription is at 877,000 stabilization compared to last quarter. ARPU, still seeing growth in ARPU, 16% compared to last year. It's an effect of the price adjustments commenced during the year. 11% revenue growth coming in at SEK 58 million and an adjusted EBIT margin at 30% as an effect of the cost reductions.

Thank you, and over to Per to get into the numbers.

[Per Andersson, executive]

Thank you, Carl-Johan. Taking a look at the subscription base, we saw a stabilized development from the first quarter and a limited decline of 4,000 users. Renewal rates were good but due to the small amount of users that were up for renewal, the renewed amount of users was fairly low.

As we wrote in the report, the new user intake grew during the second quarter, which is very positive. In the last 3 quarters, the new user intake has declined as a result of the price increases implemented in Q2 last year. Now we saw growth again, and we can see that the efforts to improve conversion rates and to drive growth through feature releases are starting to give results.

Revenues increased 11% from last year. Adjusted for FX, the growth was only 1%. Still, we managed to offset the decline in the subscription base from last year through high prices and improved ARPU. Compared to Q2 last year, the number of subscriptions decreased 5%, and we still managed to see revenue growth also adjusted for FX.

ARPU improved in total of SEK 36. And of that, SEK 14 was price increases and SEK 22 was FX. During the second quarter, we launched an efficiency program to refocus on our core business. The program allows us to free up resources, resulting in an expected reduction in costs of SEK 25 million on an annual basis, aiming for an EBIT margin about 30% going forward.

The reductions are focused on staff, marketing and other purchases. We expect to save about SEK 7 million in reduction of staff related to some positions that are redundant when we focus on the core business. As part of this refocusing and discontinuation of certain initiatives, a couple of consultancy agreements have also been terminated, including the other OpEx bar on this slide.

Historically, Sleep Cycle has been very successful in cost efficient user acquisition from organic channels. We will increase our efforts in these areas with new feature releases, improved on-boarding and other actions that will boost conversion rates. As a consequence, we will reduce marketing spending and concentrate marketing to platforms and campaigns with a good CAC/LTV levels.

In total, we expect to save about SEK 10 million on reduced marketing on an annual basis by focus on resources, and also due to a small organization, we also expect savings in other OpEx, which together with less consultants, as I mentioned, will save about SEK 8 million.

The impact on revenues from discontinuations of some initiatives is expected to be limited. And as Carl-Johan said before, with these changes, we will be able to put more efforts in cost-efficient user acquisition. This program will help focusing our resources on the core business while also free up resources that will result in a cost reduction and improved margins.

Now Carl-Johan will elaborate on user acquisition.

[Carl-Johan Hederoth, executive]

Thank you, Per. So I wanted to touch briefly on the stabilization in total number of subscribers. And I want to address 3 important drivers to this trend that we have seen in May and June.

So first of all, we have been successful in a range of feature releases. And when we release new features, there are 2 important factors that we look at. The first is engagement, that is how many users that are actively engaging in the feature. And secondly, conversion, how the release of the feature is affecting our ability to convert free users into premium subscribers.

In the beginning of June, we released the noise level feature in Sleep Cycle. High noise level during sleep can have adverse effect on your health and on your sleep quality. And WHO, the World Health Organization, recommends less than 40 decibel in bedrooms during the night. And given the effect noise level can have on your sleep, we believe this is something our users like to track and follow up on.

In terms of conversion, this feature has proven to be very successful. It currently ranks among our top 3 features that drive conversion. And since its rollout in mid-June, it has directly resulted in approximately 3,000 new subscribers during the quarter.

Secondly, we had, as we always had, a high focus on our on-boarding experience during the quarter, been very successful in optimizing user flow, the messaging and the paywalls that have significant contributed to a better conversion rate during the quarter.

The last point I want to address contributing to the stabilization in total subs this quarter is our reinitiated growth in the China market. This is a result of an overhaul of our App Store presence, including translation and localization, and the fact that Sleep Cycle has been lifted up as a recommended app in Apple Health in China, a position that drives significant installs every day.

This, in combination with the updated on-boarding experience, has lifted new subs from China significantly. So to recap, we have seen a stabilization in total number of subscribers even with an increase in the last 2 months. This is driven by successful feature releases such as noise level tracking and breathing disruptions and optimized on-boarding experience in terms of flow and mechanics and a growth in China market, driven by getting a position as an recommended app for sleep in Apple Health China.

With that, I'll leave over to Per.

[Per Andersson, executive]

So looking at the profit and loss. In Q2, we saw a revenue growth of 11%, which was 1% adjusted for FX. Compared to last year, subscriptions declined 5%, but we managed to offset that by higher prices and on top of that FX.

During the quarter, in total, SEK 1.6 million was capitalized, which mainly related to continued development of the Sleep Cycle Kids app, SEK 0.6 million was internal expenses, which are seen on the P&L.

Going down the P&L. OpEx developed positive compared to last year. Marketing spending was on the same level as previous year, while the use of consultants and other purchases were reduced as part of the efficiency program. As part of staff costs, we recognized SEK 4.5 million in nonrecurring items related to [ severe state for the ] reduction of employees.

With fewer employees, we will see decreased staff costs going forward. D&A increased due to capitalization of costs, but also due to that we moved into a new office in March this year. According to IFRS 16, the leasing cost is recognized on the balance sheet and then depreciated over the P&L. The EBIT margin was obviously affected by nonrecurring items in the second quarter. But adjusted for that, we reached a 30% EBIT margin. As I said before with all the reductions from the efficiency program, we foresee an EBIT margin above 30% in the coming quarters. The operations generated a positive cash flow of SEK 19 million for the quarter. And in total, we held SEK 105 million in cash at the end of the period. We obviously also paid a dividend of SEK 142 million in May this year. For the first half year, '23, the P&L developed similar to the second quarter, with the main difference being higher spending on consultants and services in Q1 '23 compared to '22. Revenues grew 12%, 2% adjusted for FX, with higher prices and improved ARPU being the main drivers behind this improvement.

Adjusted for the nonrecurring items in the first half year, the adjusted EBIT margin was in line with last year. Looking at the outlook, we still see an uncertain market. As I said before, it was very positive to see growth in new subscribers in Q2 and possibly that trend will continue. On top of that, we see continued growing [ our performance, ] the price increases last year that may accelerate sales going forward.

On profitability, our focus now is to realize the full savings in the efficiency program and to grow the subscriber base through cost-efficient user acquisition. We target EBIT margins about 30% in the coming quarters with lower costs for staff and marketing going forward. On the organizational side, we reduced the head count with about 10 people, including both staff and consultants. Going forward, the focus is on core product development and cost efficient user acquisition to grow the business further. And with that, over to Carl-Johan for a final comment.

[Carl-Johan Hederoth, executive]

Thank you, Per. So to summarize, our higher pace in product development is starting to materialize. Second half of the quarter, we are seeing increase in total subs, which is, for me, the ultimate [ tail, tail ] that we are doing the right things. With cost reduction and even increased focus on the product, I believe that we are well positioned towards profitable growth for the coming quarters. And by that, I leave over to questions.

[Operator]

[Operator Instructions] The next question comes from Mark Siöstedt from Redeye.

[Mark Siöstedt, analyst]

All right. So could you update us first on the price optimization rollout. Have you conducted most of the pricing changes in the near to medium term? Or do you still have some impactful markets left?

[Carl-Johan Hederoth, executive]

So we have -- we are fully rolled out on some of our biggest markets right now. But in terms of the full impact, we were not there yet. We still have certain markets that we are testing on. So we have still opportunities to push this further for the coming quarters here. Per, do you have anything to chime in?

[Per Andersson, executive]

No, Carl-Johan. Now we have been really focused on driving subscriber growth, and we see positive results on that. So there are still upsides in implementing high prices on more markets going forward.

[Mark Siöstedt, analyst]

All right. And do you see signs of new users getting used to the higher price levels now? Or do you think that will take some time?

[Carl-Johan Hederoth, executive]

No, definitely, definitely. If we look at, I mean, all the work we have been doing the last quarter in terms of feature releases and conversion optimization. If you compare new users and ARPU towards last year, you can see that we are actually getting more users in. We are having higher conversion rates on a higher price level at this point. So definitely, we're getting up to speed with the new price level, and we've done a tremendous job in increasing our capability of converting free users.

[Mark Siöstedt, analyst]

All right. Interesting. And it seems like you have an exciting pipeline for the second half. Do you think you have some features that you have not yet released that could have the same impact, for example, as the noise feature?

[Carl-Johan Hederoth, executive]

Yes, definitely, definitely. As mentioned, I have been talking a lot about the last quarters is that we've been really focused on the pacing in the product development and the velocity we are releasing to features. And I'm very happy with the road map going forward. And we have a lot of new things that I am very excited about that we are currently testing or developing at the moment now and definitely...

[Mark Siöstedt, analyst]

Yes. And could you comment on the Kids app, how are the iterations going?

[Carl-Johan Hederoth, executive]

So yes, we have -- the Kids app is released. We have a good momentum in the product and in the product development. To me, I think, we're still early in that journey, and we are in an exploratory phase in that product. We are getting good attention.

Apple is surfacing the app a lot, and we have a -- compared to Sleep Cycle, it's small, but we have a steady inflow of users coming into the app. And right now, gathering the data, learning a lot from our users feedback is the most important thing right now before we push even more traffic from Sleep Cycle.

[Mark Siöstedt, analyst]

Yes. All right. So you talked about the improved conversion et cetera. So I track reviews on your app in like App Stores. And I've seen that some users that have been on the free version appear quite upset by the paywalls. Are you concerned that their irritation and negative reviews could spill over on the organic inflow of new subscribers? Or is that not a big issue?

[Carl-Johan Hederoth, executive]

That's a very good question, Mark. Of course, we are super, super focused on the overall appearance and the perception of Sleep Cycle, of course. To mention some of the reviews and the feedback, we do certain tests and some people are getting into pretty aggressively cohorts that we are testing. So you shouldn't draw any higher conclusion on what we see in reviews. But yes, we're super, super focused on monitoring reviews, retention and the overall free-user experience. That is important to us. So yes, it's a good question, and we're super focused on it.

[Operator]

The next question comes from Dennis Berggren from Carnegie Investment Bank.

[Dennis Berggren, analyst]

Just a quick 1 on cost development. External expenses decreased quite heavily here quarter-over-quarter. How much of this decrease is related to lower marketing spend versus purchases of external services? And also should we expect this level to be representative as a run rate for marketing investments going forward given what you just mentioned on the -- well, on the exchanges related to this cost efficiency program?

[Carl-Johan Hederoth, executive]

Well, I think, of course, there will be differences between the quarters. But as we showed on the previous slide, we aim to reduce the total cost base by SEK 25 million on the full year. And in that example, we had the cost base from Q1, which was extrapolated to represent the full year. And of that, we then -- can we have a look at that. I can explain more in detail.

So in that, we see that on annual basis about SEK 7 million will be reduced from staff and SEK 10 million from marketing and SEK 8 million from other OpEx and consultants. So in this quarter now in Q2, we released this program in mid-May. So we haven't seen -- also we have adjusting for the nonrecurring items, we haven't seen the full impact in this quarter. So I believe if you look at Q1, for instance, and do like we have done here, extrapolated for a full year and then reduced costs, as described here, that will represent a high-level view going forward.

[Dennis Berggren, analyst]

All right. And then on the subscribers in Q2, I mean, you mentioned that you've seen positive effect on that. Still, we are seeing a year-over-year decline. First of all, from what actions are you seeing the best returns? And also, do you see any changes with regards to the market environment and the sort of abilities and opportunities to generate new installs? I mean is it tougher to generate a new install today compared to 1.5 years ago?

[Carl-Johan Hederoth, executive]

Yes. Thank you. So first question, where we're seeing the best result is when we release new features. That in combination with surfacing these new features to a user, packaging them with the right messaging and so forth, that is the one and second and third place in what causes our subscriber growth right now.

In terms of market climate and installs, we haven't seen -- I mean it's not -- neither harder or more easier for us to get more installs. But we see that when we're doing optimizations in, for example, the App Store presence and localizations to Chinese, for example, that in turns have effects on Apple picking us up and recommends us for Apple Health. And I mean, getting a spot in Apple Health in the China market is worth several millions in marketing spend. So that's a very good job of the growth team and the marketing team...

[Dennis Berggren, analyst]

Perfect. And then just finally from my side, I think -- I mean you're quite clear on your EBIT ambitions going forward. But I find it to be slightly more, let's say, conservative with regards to growth. I mean could you give some flavor on when you expect to see the total growth on subscribers changing for the positive? Do you expect that to occur already in the second half of this year or perhaps more reasonable to expect that in -- later on?

[Carl-Johan Hederoth, executive]

No. In terms of growth, I believe, as I mentioned in this presentation, I mean, we already see a stabilization in subscriber growth. Of course, how steady that is still hard to speculate in. But to me, I think, the most important thing is that the stabilization in subscriber is a direct effect of the initiatives that we have been doing. And that is, to me, a proof that we are doing the right thing and that these changes are more or less stable.

So I'm very happy with that in terms of what -- when we see a subscriber growth on a year-to-year comparison, it's very hard. But I think we should see a continuation of the stabilization and flattening out during this year for sure, for sure.

[Per Andersson, executive]

Also worth mentioning that in Q2 last year, we started to roll out the higher prices, meaning that now users renew on higher prices. And that obviously will also give a boost to sales.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Carl-Johan Hederoth, executive]

No, thank you. Thank you all for listening in. Happy with the quarter. Getting on the right trajectory for the coming year ahead. So thank you all for listening in.