Sleep Cycle AB (publ)

STO:SLEEP

Earnings Call Analysis

Sleep Cycle Reports Strong Subscriber and Revenue Growth in Q3

In the third quarter, Sleep Cycle achieved an 8.4% revenue growth to SEK 65.9 million, benefitting from a rise in paying subscribers to 915,000—up 28,000 year-on-year. The EBIT margin improved to 31.3%, with forecasts for 28% in 2024. The company is enhancing its customer acquisition strategies and exploring new partnerships, notably with MyFitnessPal, set to launch by November. Sleep Cycle aims to double its revenue within the next 3-4 years while improving ARPU, currently at SEK 280, targeting SEK 300.

A Strong Quarter Driven by Subscriber Growth

In the third quarter of 2024, Sleep Cycle reported encouraging growth with its subscriber base increasing to 915,000. This marks an addition of 28,000 subscribers year-over-year and 17,000 quarter-over-quarter. The revenue for the same period reached SEK 65.9 million, reflecting an 8.4% increase compared to the previous year, or 9.9% when adjusted for foreign exchange effects. Such robust subscriber growth ties directly into their strategy focused on enhancing user acquisition and retention.

Profitable Growth with High Margins

The company demonstrated a solid EBIT margin of 31.3%, equating to SEK 20.6 million for the quarter. This margin not only showcases the efficiency of operations but also highlights the scalability of the subscription model. Sleep Cycle's strategy revolves around maintaining profitability while simultaneously increasing revenue—a balance effectively achieved this quarter.

Strategic Focus on Revenue Management

The management reported that they are actively experimenting with various revenue management strategies, including localized pricing aimed at converting their free user base into paid subscribers. These efforts can account for slight fluctuations, such as a recent dip in Average Revenue Per User (ARPU), currently at SEK 280. The company aims to raise this to SEK 300 over time, indicating a clear path to enhancing profitability per user.

Innovations and Partnerships Paving the Way

The launch of partnerships, particularly with MyFitnessPal, is set to enhance Sleep Cycle’s market presence. The planned revenue-sharing model aims to attract new users efficiently, with an expected launch by the end of November. The management believes this collaboration could further diversify revenue streams and solidify their market leadership.

Looking Ahead: Optimism for Continued Growth

Sleep Cycle is optimistic about maintaining growth momentum into Q4. They are targeting a mid-term revenue doubling over the next 3 to 4 years, aiming for an annual EBIT margin of about 25%. However, based on current performance, the projection for 2024 shows a potential EBIT margin near 28%. This highlights the company's commitment to sustainable, profitable growth.

Stable Financial Position and Future Outlook

The company closed the quarter with a solid liquidity position of SEK 130 million and reported cash flow from operations of SEK 11.9 million. These figures point to a strong financial footing that enables ongoing investments in growth initiatives and customer acquisition. The leadership remains committed to their dividend policy, distributing 40% to 60% of net profit annually, reinforcing their intent to balance growth with shareholder returns.

Earnings Call Transcript 2024-Q3

[Operator]

Hi, and welcome to this webcast of Sleep Cycle Third Quarter Results for 2024. My name is Jesper, and I'm the moderator for this presentation.

With me today, I have the CEO, Erik Jivmark; and the CFO and Head of IR, Elisabeth Hedman. You can through the presentation send in questions and you can send them through the chat that you can find below on the screen that you are watching on, and I will receive them on my iPad. And we will get to the Q&A session after the presentation.

But with that, I hand the word over to Erik. Please go ahead.

[Erik Jivmark, executive]

Thank you very much. Hi, everyone, and welcome. Today, we are sharing the interim report for quarter 3. My name is Erik Jivmark. I'm the CEO at Sleep Cycle. And with me today, I have Elisabeth Hedman, our CFO and Head of Investor Relations.

So before we go into the results, I want to quickly share what we at Sleep Cycle are about. We are the market leader within our segment, and we have been the market leader for 15 years now. Our growth is fueled by the increasing awareness of the importance of sleep, and we have a very strong growth loop with 15,000 to 20,000 downloads a day, whereof 80% is organic traffic.

The reason why we have such a great product market fit is our unique way of leveraging our patented AI technology and billions of nights of anonymous data. All of this, combined with our passion for sleep science, have created a product that consumers love. It's no coincidence that Harvard and Cambridge comes to us when they want to do research on sleep and how it impacts life and health.

Our business model is straightforward, personalized sleep solution as a subscription service. We have an extremely scalable solution with recurring revenues from our subscriber base that generates advanced payments, ensuring robust cash flow.

Part of what's so great with our product is that all it takes is a smartphone. No additional hardware purchases. We're available on all common smartphones as well as wearables in 115 -- sorry, 150 countries and 13 different languages. Every night, we have more than 1 million active users. And what we do for our users is quite remarkable. We help our users to fall asleep easily with coaching programs and a sound library.

We help our users to wake up feeling rested, thanks to our patented smart alarm, and we help our users to analyze and provide insights to their sleep habits. We remain committed to our new strategy that we launched in March this year and the 3 identified focus areas to further fuel our growth. The first one is 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.

In quarter 3, we launched iOS 18, and we saw a good effect in terms of increasing both the awareness and installs. We were also featured in publications like Forbes and Wall Street journals. We have also launched successful campaigns converting free users to subscribers with the help of offers. This is all part of our revenue management initiative, where we started to experiment with localized prices and offers. We will continue this in quarter 4 and also testing higher price points in some markets.

The second one is user engagement. We will continue to invest in the product and work with conversion, increase engagement and thereby decrease churn. This includes win-back offers for churned users as well as improving our core technology when it comes to data and reliability.

And finally, we will look to add a new layer of revenues, monetizing our data and technology. Towards the end of Q3, we've started to explore some of these initiatives in how to leverage the platform and the data as well. I will share more insight once we have something tangible.

So the first and the second one is all about doubling down on the core product. We are the market leaders, and we will remain so. Sleep is ours to own. The third one is an option that we don't know exactly yet how it will play out. Partnership is a key component for us to reach adjacent segments, but also to build local market relevance and presence.

In Q3, we saw growth from our current partners, Wellhub and Revolut, and we are also deepening our relationship with them and as well as signing new ones. I'm happy that we could, for example, show the market what we mean by our new partnership together with MyFitnessPal, where we will be leveraging a new feature called Contingent pricing, 50,000 installs every day.

In quarter 4, we will offer Sleep Cycle premium to their new users with a rev share model. The estimated go-live date is in the end of November, and I'm looking forward to see how this will contribute even more to our growth. It's a very cost-efficient customer acquisition strategy.

In conjunction with our new strategy, we shared our updated growth targets. We aim to double the revenue in midterm 3 to 4 years of time, around 25% in EBIT on an annual basis. However, given our successful profitable growth, we are now looking at approximately 28% EBIT in 2024. The dividend policy is unchanged, 40% to 60% of net profit every year. We are combining profitable growth with an attractive yearly dividend.

[Elisabeth Hedman, executive]

All right. Let's summarize the financial development for the third quarter. Our base of paying subscribers has grown at a higher pace for the third quarter. It's up from last quarter and also from the same period last year. We had 915 paying subscribers at the end of Q3, which is 28,000 more than last year and 17,000 more than last quarter.

Our revenue has increased with 8.4% with a revenue of SEK 65.9 million. The EBIT margin was 31.3%, and the EBIT was SEK 20.6 million. We delivered a strong result quarterly financially, adding more new subscribers, increasing their revenue while maintaining a high margin.

Looking at the development of our base of paying subscribers, we had a very successful quarter. We increased the number of subscribers during the quarter to 915,000. And we did this through a strong commercial focus and commitment to our core product, bolstered by early-stage experiments in revenue management and as well as growth from our partnerships.

Looking at the net revenue, as I said, it was SEK 65.9 million from the quarter. It has continued to grow at a steady pace, and it was up 8.4% in the quarter compared to last year. However, if we take away FX effects, it was actually 9.9%. A comparable -- compatible figure for last year was 2.7%. Our business model with a recurring revenue caters for future growth.

There are a couple of strategic KPIs that support our goals and which we believe will help us reach our target to grow our revenue. As of the number of installs, we want on a yearly basis to reach 8 million to 9 million new installs. And during the third quarter, we continued to increase installs compared to last year. However, we still need to put in a bit more growth before reaching our targets.

As of conversion rate, it's set out to target 8%, and we're steadily working on increasing the conversion rate. The retention rate had a slightly lower development during the third quarter. We still want to improve it with 2 to 3 percentage points. The target for ARPU is to reach SEK 300. As new customers are gained at a higher ARPU, when they renew, the total ARPU increases. Right now, we are at SEK 280, which is an increase of SEK 5 since last year, of which plus SEK 9 comes from revenue management and minus SEK 4 comes from FX effects.

Okay. So the third quarter resulted in continued profitable growth for Sleep Cycle. Let's quickly walk through the P&L. We had a revenue growth of 8.4% or 9.9% currency adjusted. And this is a result of new subscriptions from the last 12 months since a large part of our sales is recognized over 12 months. We have also seen a positive development within revenue from our existing partnerships, particularly Revolut and Wellhub.

Our platform fees are at large developing in line with the revenue, and the external costs were SEK 15.1 million. During the third quarter, we have increased the investments within customer acquisition and growth within our core product, but we have also intensified our work with new initiatives. Keep in mind that last year, the marketing function was in-house, and this year, it's performed externally.

The staff costs include higher costs related to incentive programs approved by the Board. Adjusted for that, the cost per employee are similar to last year. As previously mentioned, the EBIT was SEK 20.6 million with a margin of 31.3%, and we had no nonrecurring items during the quarter. And we continue to demonstrate a solid financial position with a liquidity of SEK 130 million at the end of the quarter and cash flow of operations was SEK 11.9 million. Last year, the liquidity was SEK 118 million, and cash flow from operations was SEK 15.3 million.

For the period of January to September 2024, we can conclude a stable financial development. We had a revenue growth of 11.7%. And when adjusted for FX effect, it was 10.5%. One year ago, the FX adjusted growth was 2.2%. Our capitalized expenses were lower compared to previous year as previous year included work for the Sleep Cycle Kids app, which we later discontinued.

During the first 3 quarters of 2024, we delivered a strong EBIT of SEK 55.4 million with a margin of 28.5%. One of our financial targets is an EBIT margin around 25% on a 12-month basis. With 1 quarter remaining of the year of 2024, we believe that our EBIT margin for the full year will come in a bit above that, around 28%.

[Erik Jivmark, executive]

So to summarize a little bit, my key takeaway from this period is that we see a positive result of the new strategy and our new focus. We're adding 17,000 new subscribers quarter-over-quarter or 28,000 year-over-year. We're also growing revenue 8.4% year-over-year, and we do this while we're protecting EBIT, being smart about our investments.

Of course, I feel positive about the things that we're putting in the market, but it's also too early to declare a complete new growth trajectory. Focus, dedication and hard work will be required also going forward, but we have a team in place that is competent and motivated to continue our growth journey.

Thank you for your support. And with that, I'm happy to take any questions.

[Operator]

Thank you very much for this presentation. And as a reminder to you that are watching, you can send in your question through the chat that you can find below on your screen. I think we can start off direct. Could you clarify if the slight quarter-on-quarter decline in ARPU is related to revenue management strategies? And additionally, can you share which initiatives you have tested in your assessment of their outcomes?

[Erik Jivmark, executive]

So yes, I think some are related to the test that we have done. The testing we have done has primarily been around converting free users. So we have to remember that we have a free user base today that don't pay anything for the product. And with the gross margin that we have for the product, if we can convert them at a particular price, it's better than it is today. So, of course, that could impact the ARPU in average. With that said, though, all the new users that we take in, we take in at a higher ARPU. And as I mentioned, also in quarter 4, we will also try to test to increase the prices. So we are doing both at the same time.

[Operator]

In your CEO letter, you mentioned securing new partnerships that enhance your market position. Could you provide more details on these collaborations aside from MyFitnessPal?

[Erik Jivmark, executive]

I think MyFitnessPal is a good sign of what kind of partners we're looking for. So we're looking for global partners with reach within a segment that we don't necessarily reach today. So I think that was a very good example. We're looking for other similar, but we're also looking for partners that can help us to position us outside of the tech environment. So it could be different brand partners that we are looking for. We have some in the pipeline, but we will share them as soon as they are mature enough.

[Operator]

Are you still observing strong momentum in terms of new subscriber growth as we move into Q4?

[Erik Jivmark, executive]

Q4 is continuing. But as I said, it's requiring hard work and focus. We're very proud about the fact that we managed to grow so many subscribers in Q3. The team is very focused on continuing the growth. But we're 24 days into the quarter. We are in a good place, but there are still many, many days to come.

[Operator]

Have you also experimented your offers to include different subscription length such as monthly subscriptions?

[Erik Jivmark, executive]

We are already experimenting with monthly. It could be either through partners or directly. So it's already in place.

[Operator]

And a question regarding the collaboration with MyFitnessPal. It seems to have good potential. Can you expand on how the details there will look like? You have mentioned rev share. So my question is, will you offer premium cheaper for users to have MyFitnessPal subscription? And how will this affect the ARPU?

[Erik Jivmark, executive]

Yes. So it's a bundle that we have with MyFitnessPal, and it's a new feature that I shared before with Contingent pricing. So that's also why we're not 100% in control of the timelines of the go-live. That's why I wanted to share today that the latest estimate we have of go-live is towards the end of November, but we are depending on a lot of things, also technical things on Apple's side.

When it comes to the setup, we only pay for users that decide to convert to a premium subscription on Sleep Cycle. So it's a very cost-efficient way. We're not paying for being visible to all these 50,000 users downloading the app every day. We only pay once they convert. There is a rev share model. So of course, the price will be higher than if we would go out and seek this customer ourselves. At the same time, I think we need to understand that some people today doesn't necessarily link their goals that they have with sleep. If we show up together with MyFitnessPal, our ambition is that we will reach customers that we wouldn't have reached otherwise.

[Operator]

And a question here. What do you think about the buyback program? Or is an expansion program more interesting for you?

[Erik Jivmark, executive]

It's really a question for the Board, mainly.

[Elisabeth Hedman, executive]

But obviously, we are looking at how we want to use our capital, and that is an interesting option, but it's not for us to decide.

[Operator]

I hope that was an answer enough for the private investor who asked the question. And at that moment, it seems to be the last question we have at this time. So I hand the word over to you for any closing comments.

[Erik Jivmark, executive]

Thank you. Thank you very much, and thank you. We had a very good quarter. And as I said, the team is super motivated to continue the growth journey. Thank you for having the trust in us, and thank you for today.

[Elisabeth Hedman, executive]

Thank you so much.