Storytel AB (publ)

STO:STORY B

Earnings Call Transcript 2020-Q1

[Jorgen Gullbrandson, Chief Development Officer]

Thank you so much. Welcome, everyone, listening to this call. Sitting here in a small studio at the Storytel headquarters in Stockholm, together with Ingrid Bojner, our Chief Commercial Officer.

[Ingrid Welinder Bojner, Chief Commercial Officer]

Hello, everyone.

[Jorgen Gullbrandson, Chief Development Officer]

We will be presenting and delivering the Q1 report to you today. So please hang on. Next slide, please. So the first slide show you the subscriber and revenue growth that we have seen in Q1 this year compared to Q1 2019. This was disclosed in our top line report that we disclosed a month ago. But for those of you that haven't seen it, we grow our subscribers, our paying subscribers with 38%. This is a really good number. And we grew the revenue with 45%.Who that follow the company know that the higher revenue growth in these quarters are mostly derived from the lowered VAT rate in many countries that we saw the full effect of in Q3, Q4 last year, which means that Q1 is a comparable quarter to a quarter with higher VAT rates.So we foresee this positive trend to decrease over the years. That said, we still see countries lowering the VAT rates, certainly was Spain as the last country on April 23, where the parliament decided to lower their VAT rates on digital publications like ours. It went into effect the day after. So fairly quick motion that.Next slide, please. So highlighting the reports that you might have seen. So as I said, the sales were up, ending at SEK 429 million of streaming sales from SEK 296 million in the same quarter last year, so significant growth, as you know.Our subscriber base is now 1.154 million users, up from 834 million the year before. The net turnover SEK 513 million, substantial increase that as well. And worth noting then, of course, is that we successfully completed a directed share issue on February 20. We brought in SEK 948 million to the company [indiscernible]. And yes, it's a true success, and just before the market turmoil. So we definitely had the cash we need to execute on our business plan for years to come.Next page, please. So might be boring, but these are important stuff as well. New accounting principle starting with Q1. We have informed you in the past that we plan to do this and now we have done it. So starting with Q1 2020, we start using the capitalization model instead of expensing model for the internally developed intangible assets of the company.So what does this mean in plain English then? Yes. The costs we have for developing our platform and our service are mainly IT costs, the ones that are expensed to develop new functionality or a new app or whatever is being put in the balance sheet. It enters the P&L as a revenue under the K3 protocol that we use. So that cost is now that also a revenue, so the EBITDA effect will be 0 by those transaction.Also, all the audiobook recordings that we do, we do quite a lot. And the audiobook recordings are things that we can use for many years to come. And this is something that we have then activated or capitalized as of Q1 this year.The full effect of this one is that we get an additional revenue, as said, of SEK 47 million. And a small amortization starting in Q1 by SEK 1.5 million. So the net effect on EBITDA level is SEK 45.3 million in Q1.Under K3, you don't do refractive recalculation. So it's really starting from January 1, 2020 and onwards. If you look at this margin-wise, you can see that we now increased our contribution margin up to 21.6% from 15% as it would have been if we hadn't used this new accounting principle.Worth noting as well is that if we would have used or if you compare it to in the past, still, our contribution margin is greater using the old accounting principle in Q1 than it's ever been before. So even though it's looking even better with the new accounting principle, we had an all time high of [indiscernible].The EBITDA margin comes in, in Q1 at minus 5% compared to what would have been minus 14.7% using the old model. So these all things makes us a lot more profitable, but no major change really.It's just that we display it in a way that is usually displayed by all major companies in the market. I hope you will find this clearer to show our underlying profitability in our 2 markets.Next slide, please. So looking at the details, all the numbers, starting with the revenue line that we've talked about before, you can see that we have an all-time high in terms of revenue as well as at SEK 429 million in Q1. This is a number that is not affected by the change in accounting principles.Our contribution profit, though, increases substantially. So you can see it increases from SEK 64 to SEK 93 almost based on this accounting principle.Contribution margin then follows up from 15% to 21% as I said before, but you can also see that the historical numbers, that even the comparable actually is higher than it's ever been before.Our paying subscribers, yes, you can see 1,154, as what was mentioned before, and the ARPUs are unchanged from our top line SEK 124.Looking at the different segments. As you know, we disclose the Nordic and the non-Nordics, Nordics being the mature, older countries with bigger customer bases, and the non-Nordics are typically the ones that are still in development mode and where we haven't been that long time.So coming up from a big negative contribution margin to a way much lower, basically down to minus 26% contribution margin with the new method and minus 52% with the old one compared to about 100 a year ago. So we're definitely moving in the right direction when it comes to profitability.We can also see the ARPU in the non-Nordic countries are increasing, while we have seen a decrease in the Nordic countries as we talked about before. The main reason to the increase in ARPU in the Nordics was 2 fold. One is that we had a bigger blend of family subscription, which is something great.Family subscribers tend to stay longer, which means that they give us a higher customer lifetime value. And the other change was -- or is actually that we have a significant business in Norway, and their currency has taken a big hit from the consequences of not only corona, but also the decrease in oil price.So you know all this. So that took a couple of krona from our ARPU in the Nordic as well. Our consolidated ARPU is decreasing due to these 3 factors, but also the fact that we grow quicker in non-Nordic countries with a lower ARPU than we do in the Nordic, more mature countries, but this is what we see.Glancing into the future. You see that we have a column with forecast for Q2 2020. So I think I need to mention, we now stretched the bar a bit and say we should reach 1.25 million subscribers, 1,250,000 subscribers by the end of the second quarter, which is the growth of 96,000 subscribers, almost in that quarter. The revenues will increase as well up to SEK 458 million.The ARPU is stable in the Nordics countries, we believe, in Q2 and so as well in the non-Nordic countries. The blend will be decreased, simply because [ we have victory ] in the non-Nordic countries here as well. So fairly stable outlook for Q2 as well.Worth mentioning, and I will probably do that a couple of times in this call. The uncertainty is greater than ever based on the all the turmoil in the market. From our perspective, it's more difficult than ever to make a forecast for Q2 and also give guidance for the year and coming years as well. So next slide, please. I hand over to you, Ingrid.

[Ingrid Welinder Bojner, Chief Commercial Officer]

Thank you. So looking at backwards on Q1. And of course, it's important to mention, the world has been in a different place during this time. And since we are operating in 20 countries across the globe, we have seen the effects of the coronavirus spreading earlier than, of course, Central Europe has done since we are operating also in Singapore and South Korea.So very early on, the first and foremost important thing for us has been to ensure the health of our staff and employees. So that has been the focus for us throughout this whole situation. We have been working from home for a long time in some countries, longer than others. And, of course, been looking at the different local restrictions and comply.Second, of course, is to ensure that our operations have been ongoing. And we're very happy to say that it has been working very well for us. We are used to working digitally and online and being on the videoconferences since we have always supplied a very climate friendly travel policy within the Storytel group. So that came as something easy for us to continue to implement while working from home.Second of all, of course, for us, production of audiobooks is very important. We, of course, want our customers to engage in books and, of course, new books as well and recent books.So we're happy to say that we have found creative and alternative way to continue with production, even though for some time, it was closed down for a while. But working with different digital health, we've actually managed to do home recording and remote production assistance and after production.Then turning to maybe the more important thing. I think our mission, Storytel's mission to make sure that the world becomes even better with sharing stories and that they will be shared for anyone, anywhere and anyhow. This has come in, in fact even more during this past month.And of course, already starting in Q1. So more and more customers have actually turned to Storytel. And we have a bigger base of trial customer that we have ever had before. This is due to 2 factors, of course, a large pool in the market. And secondly, also that we have offered -- we thought that was also a good way to offer something back to the community. So we have offered our service for free for 30 days in several countries, whereas our normal trial period is only 14 days.We have also put an emphasis on lots of different community efforts and storytelling activities. Everything from mindful curation of our content to, of course, author readings, engaging with their customer base or readers and listeners.And also some local community collaboration and to ensure that we take part in the better world that we're trying to create. Last but not least, we have actually seen some changes in patterns of how people consumes. And this is, of course, related to different type of behaviors that some countries have been undergoing through and working from home changes behavior on [indiscernible], et cetera. But we've also seen some other impacts on what people read during the period.Next slide, please. So I mentioned the reduced commuting spikes. So typically, our service, what we showed on the Capital Markets Day in January, people consume on weekdays our service, mostly in the morning and afternoon when they commute back and forth to work as well as the night is a prime time for us, which is also a prime time for any type of media consumption. And this has been something we have been moving out a little bit during the day. Even though nighttime has been, of course, a big spike continuously for us as I think people turn to our service for comfort and distraction and [indiscernible].Crime thrillers and also fiction keeps on being a very highly consumed segment for us or genres. But we have seen children category rise a lot and we're very happy to see that the Kids Mode, which we implemented in 2018, which is a secure way to look at your Storytel app for kids so that they only can see children content. And that Kids Mode has actually been used more and more as parents have found it to be very helpful to have their kids read and listen to books on our service.Last but not least, I want to mention that we have also been able to do some very innovative stories and podcast during this period. It started already early in Italy in Milan, where a very famous actress wanted to really talk about what people are going to during lockdown and [indiscernible].So we started to publish stories, actually produced and recorded from people's home and went to different type of people with different work environment. So a teacher, somebody working in business, a production person, et cetera, so that we've got a wide perspective of how people were living in COVID during these times and also had that [indiscernible]. This is spread across the Storytel group as we like to share, of course, ideas and thoughts around the group. So we've done a similar story for the whole Spanish-speaking world where we've used people and narrators for different type of dialects in Spanish also to make it very relevant and close to our customers.Next slide, please. Publishing houses. When it comes to the first Q1, we had a good quarter for our publishing houses. But it's needless to say that, of course, the corona situation has also lately had an impact on the publishing industry as a total. And we see that the digital transformation is getting acceleration in terms of how people want to consume and listen and find relevant stories and books.So we believe that our publishing houses are well positioned since we are working closely with one another in order to capitalize also on the digitization of the publishing work. We have also had some celebrations. Anna Jansson had her 20th birthday for Maria Wern, which is the popular thriller series in Sweden as well as Rangan Chatterjee as well as Nina Wähä, which belongs to our publishing houses.So I think we have had a nice quarter for the first part of the year and need to look into how we continuously drive the digitization and ensure that we keep on doing the right efforts for the industry.

[Jorgen Gullbrandson, Chief Development Officer]

Yes. I mean we get some questions about the publishing houses and how are these functioning in these difficult times? And definitely, the physical sales have come down. We are seeing that in all public reports.But remember that the Swedish market is up to 50% consumed by digital when it comes to fiction books. So we are well prepared for this shift and less maybe affected that you could expect I'm thinking about it in the first half. And also the first quarter, as you mentioned, Ingrid, they're showing really good numbers, better than expected sometimes.But as you say, it will most probably be worse over the year. But I think we're in a very good position to handle that. Next page, please. So as we looked a bit before, the forecast for Q2. So here, you have numbers in percent as well. The subscriber growth, it's been up 40%, very good number and higher than the yearly guidance. And the revenue growth is up 43%.We had put in a little box there saying that we definitely see great uncertainty in forecasting. How should we -- how would these new users behave? We don't know. But at least, it's really good that we get a lot of new people trying our service, and we believe many of them will stay even after this period.So really good growth that we foresee in Q2. Next page, please. Looking at the financial targets. So these numbers, most of them, you have seen many times before, if you follow the company. So our 2020 target is still the same, we believe. We will reach 1.5 million paying subscribers, which will be a 36% growth. And you can say, well, how can you be so sure? We are, by no means sure, but we can say in the numbers that we've seen so far, we have seen no evidence that we should change it either up or down. So that's why we keep it.Looking at the revenues, it's same organization. We really don't see any reason to change it. So we keep the same target for the full year. When it comes to our guidance on EBITDA margin, we had to make a change, and that is because we changed the accounting principle.So we used to guide negative 10% to 12% since we had a difference in EBITDA margin, looking at the first quarter of 9.3%. When looking at the old and new method, we will simply change target of minus 1% to minus 5%. A bit larger target, as you can see, and I blame the corona situation for that [indiscernible] simply higher.So no change in this target either really. And we say for the year, we should reach a stream profitability on a local level in an additional 2 to 4 markets. We're already in 5 markets, including the Netherlands, that we turned profitable in January this year. And we should launch in 1 to 3 markets. Yet again, we believe we should be able to keep that even in these times for this year. So really no change here, which I personally think is fine [ of stream ].Looking at the long time target, these numbers, we think we should grow at least 40% on paying subs and 30% -- 35% in revenue. And the hard target here would be the revenue and then depending on the ARPU levels and where they come, it might be more paying subs that needs to be taken into consideration.And we will continue to prioritize growth before profitability, but keeping a close eye on our customer lifetime value through SAC, so that we bring in new customers that actually add value to the company.On a local level, on a country level, we say, in 5 years, in every country we enter, we should reach profitability in that market. And we have done that in many markets so far. And we should also launch in '20 more markets over this period, taking us to 40-plus markets in 2023. So no big change except for the EBITDA target here.Next page, and that's where we open up for any questions from the group.

[Operator]

[Operator Instructions] Our first question comes from the line of Derek Laliberte from ABG.

[Derek Laliberte, Research Analyst]

First off, you mentioned that already in your trading update that you had unprecedented subs intake in the latter part of March, and was saying also that the trial base is 3x normal levels. How have -- can you say anything on how conversions from trials have looked compared to normal levels there and what you're seeing?

[Ingrid Welinder Bojner, Chief Commercial Officer]

Thank you, Derek. Yes, we are, of course, looking at this very closely, and we can see that we don't see any real differences in commercial levels so far. I think it's important also to note to say that one of the effects from the change in 14 days to 30 days in some of our markets, actually evidently, it means a higher trial base for us since they are converting later. So there's a time effect also in that number.

[Derek Laliberte, Research Analyst]

That's very clear. And then secondly, regarding the whole COVID-19 situation, I was wondering if you could say anything on how this is affecting production costs and the availability to do even better quality there with perhaps more people involved in that business being available and also what you're seeing in terms of advertising had some costs, I mean clearly, this is affecting the dynamics of supply and demand in all sorts of areas. So I think any flavor on those 2 elements would be helpful.

[Jorgen Gullbrandson, Chief Development Officer]

Yes. Jorgen here. I can start with the production side. We really haven't seen any big change in production costs, at least no increase. We had -- I mean we are a truly digital company. So we had the tools in place to actually do the recordings remote, and we can mix it and handle it. We have recording studios in the homes of our mostly used narrators in many markets.So even though there was a short effect in the beginning, we are up and running in most countries with the greenlight on our KPI dashboard that we use internally to see where we are still producing. So not big downturn in that sense.When we look at the narrator seen, many more narrators have become available, where they usually make their money in theaters or audio recordings or whatever that is have been canceled. So they are available, and we are a good source of revenue for them.And of course, we take the opportunity to get good names to record our books in these times. That's a good commercial effect for us, but also feels good to be able to contribute to part of the society with that.And Ingrid, on advertising costs. Maybe you want to take that?

[Ingrid Welinder Bojner, Chief Commercial Officer]

Yes. So on advertising cost, I think that you are aware of that many media companies are having a hard time, at least initially, as many advertisers were pulling maybe some of their commercials. We have actually done quite the opposite. We have felt that we should continue to be present in marketing and also continue to invest. And hence, also, that's, of course, why we have also reached more people during this time. So it's been both a word-of-mouth effect, but also a marketing effect. When it comes to costs, I think that it's difficult for me to say exactly the level. But it's a supply and demand business as many other businesses. So I think we have been able to have actually on the margin, lower costs for our market in terms of [indiscernible] cost.

[Jorgen Gullbrandson, Chief Development Officer]

Maybe worth mentioning as well. It's probably obvious, but we have a shift in marketing spend as well, where -- I mean we don't get much from outdoor these days, but it's more online marketing as such. I actually had a call from a very concerned shareholder that went to [indiscernible] in Norway for that our ads were still up there 2 months into the COVID. But the truth is that they -- that we just left there. We're not paying for them as I could ensure the concerned shareholders.

[Ingrid Welinder Bojner, Chief Commercial Officer]

Yes.

[Derek Laliberte, Research Analyst]

Thank you very much for that favor and clarity. Then finally, or I know you don't always comment individual markets, but is there any markets or regions worth highlighting here from EBITDA positive or negative standpoint for the current quarter?

[Ingrid Welinder Bojner, Chief Commercial Officer]

Yes. It's very good that you know that we're not commenting on any individual market. But I can say that the larger effect on intake that we have since have been fairly correlated to markets who have been very strict on their lockdown. So I think that's more a general statement.

[Operator]

And the next question comes from the line of Joachim Gunell from DNB Markets.

[Joachim Gunell, Junior Analyst]

So 3 questions from me. Starting off, I mean, understanding that it's very difficult to predict what's going to happen. But I'm curious if you could share anything that you look at that sort of, say, key indicators as you try to plan for the business for 2020 and how those indicators have changed from, say, the CMD to where we are today.

[Jorgen Gullbrandson, Chief Development Officer]

Yes. I think we try to say that every outlook that we did, both for the full year and for the long term, we keep them. We keep our targets. We really don't see any firm evidence that we should change any of them. So in all the actuals is looking good, and we have the same KPIs, I would say. However, pointing out again, the uncertainty is great. And who knows what will happen in Q3 and Q4 this year to the economy in big. And that is a big question mark for us. So really no big change as such.

[Joachim Gunell, Junior Analyst]

All right. Okay. So the contribution margin step-up from minus 94% to minus 50% in non-Nordic streaming, I mean it's nothing but impressive here, but can you comment a bit on what drove this improvement and whether it's sustainable, et cetera?

[Jorgen Gullbrandson, Chief Development Officer]

Yes. Thank you for asking. I mean looking at the long-term trend, you can see that we have been improving it significantly quarter-on-quarter for quite some time now. So I believe it is a sustainable trend definitely. Also, the main driver to this is the big growth in subs and in revenue in these markets.So when we start off the market, we need a number of subs. We also need to record in many cases many audiobooks and you need big production engine for that. Over time with growing revenues, that margin will simply be better, but that's [ masked ]. So I would say -- I would dare saying that it is just the same as sustainable for the future.

[Joachim Gunell, Junior Analyst]

Okay. That's clear. And yes, finally. As you -- we more or less reiterated your 2020 guidance here, does it compensate any meaningful new market launches? Or have you revised the plans for that?

[Jorgen Gullbrandson, Chief Development Officer]

Our plan to launch market for the year is the same. We said 1 to 3, and that is what we will deliver on. So no change as such. I would say that work, exploring new markets is progressing according to plan.

[Ingrid Welinder Bojner, Chief Commercial Officer]

And I mean the only uncertainty there is that we have a plan in place, and that's something fundamentally happens in the world that makes one of these countries that are in the plan not being able to launch basically. But we don't see that those factors are here right now, as we can see.

[Operator]

And the next question comes from the line of Hjalmar Ahlberg from Kepler Cheuvreux.

[Hjalmar Ahlberg, Equity Research Analyst]

Maybe a question, you touched a bit up on publishing business. And I mean you have acquired some publishing units historically. Do you see this as an opportunity to, I mean, increase your own publishing units if others are struggling?

[Jorgen Gullbrandson, Chief Development Officer]

Yes. I mean, generally, we cannot comment on potential acquisitions at all, neither for the publishing houses. But you could just looking at the market, I would foresee that there will be opportunities coming up under these difficult times. And as you know, we have the cash in the bank to be able to use any of these opportunities coming up. So I think that's the only thing I will do in commenting on that.

[Hjalmar Ahlberg, Equity Research Analyst]

Okay. But would you say -- if you move into new markets, would you say it's important to have more own content or does it work well to buy content in new market as well?

[Jorgen Gullbrandson, Chief Development Officer]

I mean it depends on the market. They are very different. You could access to market where there are hardly any recorded audiobooks, then you simply had to record them. And you can exit -- enter other markets, whether it's a great buyers of audiobooks, then I would say it's easier to simply like us from someone else. That's what we do. But we are able to work in both [indiscernible].Generally before we acquire publishing houses, we usually historically have waited until we have a volume in the market for that, which is easier to bring the investment back doing that. But that's just pointing out how we acted historically.

[Hjalmar Ahlberg, Equity Research Analyst]

Okay. Right. And then a question on seasonality. Historically, Q3 has still been the quarter where you have the strongest subscriber growth. Now it changed a bit maybe with more non-Nordics [indiscernible] and change of that during this year or do you think that will be the same?I understand it's more difficult than usual to talk about this, but just if you see any changes there?

[Ingrid Welinder Bojner, Chief Commercial Officer]

Yes. It's, of course, more difficult than any time to predict such a behavior. But as you pointed out yourself, Nordics have traditionally been a very seasonal market as we have longer periods of time where people go on holiday and tend to actually consume more books and stories during that time. As we have entered many of the other markets outside Nordics, there is no such vacation behavior as well as seasonality vacation behavior.So we are offsetting that as we are growing more and more into other countries. When it comes to the coronavirus, I would say that in a way, you can see that as a seasonality effect because, of course, this has been something that every country in the world has been seeing. So people have stayed at home more. They have turned to other things to find comfort or just reducing clarity or feel less lonely. And sometimes also escaping with a really, really good book. So I think this is a seasonality effect, of course, if you would try to extrapolate that.

[Hjalmar Ahlberg, Equity Research Analyst]

Got it. And then last one on the new capitalization impact. I guess you can't guide on future, but would you see this level that we saw in Q1? Will that -- do you see that being a very volatile number or something that will have a close collation to sales when you grow, if you can say anything about that.

[Jorgen Gullbrandson, Chief Development Officer]

Now as you said, we haven't guided about that. And it's honestly difficult to forecast as well, even for us. But I don't see Q1 stand out in any way. So it should be a good proxy for coming quarters as well.

[Operator]

[Operator Instructions] Our next question comes from the line of Oscar Erixon from Carnegie.

[Oscar Erixon, Financial Analyst]

A few questions from me. First of all, regarding your subscriber forecast for Q2. You talked about the uncertainty here a bit, but for the forecast, are you assuming your normal retention rates and user behavior? Or are you taking more sort of a conservative approach?

[Jorgen Gullbrandson, Chief Development Officer]

I would say, I mean, yes. What is the usual, you need to ask yourself. So we are looking at the data. We are analyzing in detail. We know how they came to us and when the trial period ends. We're using the same pair of glasses, I would say. But as we've said many times, the uncertainty with the new ones coming on board in greater amount, which is we don't know. But we try to make a reasonable estimation, not being too much on the safe side, but definitely not very aggressive either. So I would say, balanced way of doing it using the same tools that we always use when doing the [ progress ].

[Oscar Erixon, Financial Analyst]

Got it. Very good. And my second question on the quite resilient performance from print publishing in Q1 given the situation specifically [ Q2 ] being down quite a bit. Could you elaborate a bit on the performance and perhaps how the revenue mix shift has been between digital and physical channels, e-commerce and physical retail? And also a follow-up there, if Q2 will see a larger negative impact or smaller?

[Jorgen Gullbrandson, Chief Development Officer]

So looking at Q1, you need to remember that the lockdown effect came mid-Q1 and the print publishing business is mainly driven by preorders that are put in beforehand, which means that for the print publishing business, revenues is up, it is hardly affected at all, I would even say, unaffected by the COVID situation that will come up later.I will not guide on anything coming to our publishing houses on the future. But just saying that the market overall is definitely down, and we see that. And I believe we are good owners to the company in these times because we are so digital as we are. And as I mentioned in the beginning, the Swedish market being -- where we have the biggest publishing house, 50% of the total consumption of books is digital books, which means that we are well prepared to handle a downfall in the market as well.

[Operator]

And as there are no further questions, I will hand it back to the speakers.

[Jorgen Gullbrandson, Chief Development Officer]

Great. Thank you so much for listening to us, and thank you for the great insightful questions from you guys. Looking forward to talking to you in a quarter's time again. Take care.

[Ingrid Welinder Bojner, Chief Commercial Officer]

So thank you so much. Stay safe.

[Jorgen Gullbrandson, Chief Development Officer]

Bye-bye.

[Ingrid Welinder Bojner, Chief Commercial Officer]

Bye.