Acast AB (publ) (ACAST) Earnings Call Transcript & Summary

Go ahead with the meeting.

Thanks very much. Hello and a warm welcome to Acast Q2 '22 Earnings Call. As always, it's great to have all of you here and a big extra welcome to anyone of you who is watching this for the first time. My name is Ross Adams. I am Acast's CEO; and I'm joined today by our brilliant CFO and Deputy CEO, Emily Villatte. Okay. So before we dive into the numbers, I think it's worth reminding you all about the fundamentals of our core Acast strategy, and especially for those of you that are new to this call. Podcasting is a very fragmented space and it can be difficult to get your head around it with who does what. But the key thing to understand here is that Acast plays a central role globally in hosting, distributing and monetizing content for podcast creators. Our vision is built around the creator and that thriving creator economy. Acast is effectively a 2-sided marketplace servicing the 2 main stakeholders. The first stakeholder group is the supply side and these are the creators, the podcasters who are right at the center of everything we do. And today, we represent 66,000 of them and that number is growing all the time. Then on the other side, we have the demand side. Firstly, this comprises of 2,400 advertisers that run campaigns on those podcasts with Acast in the past 12 months. And that number is getting bigger every year. We'll look at our offering for advertisers in a little more detail later on in the presentation. And secondly, and this is a newer growing trend. The demand side now also includes the monetization of podcasts directly from their listeners, for example, through the likes of subscriptions to premium or exclusive content. And that support comes from some of the 87 million monthly unique listeners in our marketplace. Everything we do and everything we build is done to support both sides of this marketplace. And it's our mission to enable podcasters of all sizes to find their valuable audience and to make money from their craft. That's why we make sure their content is distributed to absolutely anywhere and audience is able to listen and discover their show all while ensuring they retain complete creative freedom and control. And for brands, we offer creative advertising solutions that reach the most targeted, passionate and engaged audience of affluent listeners driving maximum effectiveness and ROI for the advertiser whilst always respecting the unique relationship and bond a podcaster has with their listener. And these things are key and unique to Acast. We are a pure play podcasting infrastructure company, and an app independent marketplace. We are podcasting and nothing else, which means we have a singular focus on extracting maximum value from the podcasting economy for creators and advertisers alike. Okay. Let's talk through the headline numbers. Acast delivered 39% net sales growth in Q2 or 28% organic growth, reflecting a general cooling of the ad market for podcasting. Our gross margin for the quarter was 30% and was impacted by one-off costs related to long-term podcasts or contracts in the U.S. These costs arose as a result of the revised ad market outlook. And excluding those one-offs, the gross margin would have been 35%. Our adjusted EBITDA margin was minus 31%. This comes following a period of heavy organic and strategic investments, which, of course, culminated in the purchase of Podchaser. We're now past this heavy investment period, and expect the EBITDA margin to improve from here on, albeit subject to the usual seasonal fluctuations, of course, to reach breakeven in 2024. As a result of the macroeconomic environment, we have updated our financial targets which Emily will go through shortly, but I'd like to firstly add some color on the podcasting advertising market. Firstly, it's clear that every company and every industry is still facing a level of uncertainty on a macro level. And this has led to a cooling of the advertising market globally. Podcasts have proven more resilient than the general ad market and the podcasting market is expected to grow by around 15% in 2022, and still reflects the continued high level of activity compared to other media channels. Podcasting is still a media that has some way to go to be effectively and fully monetized. And for us, there is ample runway to continue to grow and better utilize the inventory available and the ad money will continue to grow over time given the effectiveness of the medium and the high ROI advertisers see from it. In terms of how we see the change in pace of growth impact the business, we have seen a relatively strong performance of host-reads whereas the growth pace of programmatic has slowed slightly in the last quarter. Acast is still growing at around 2 times the pace of the market at 39% net sales growth or 28% organic, and is therefore taking market share. So to recap, we continue to grow and take market share in a controlled manner with an adapted pace of investment and cost control. We find ourselves in a different macroeconomic context than last year and we've adapted to that and we will continue to do so. It is with that in mind that we have revised our financial targets which Emily will go through now.

Thank you so much, Ross. All right. So let's have a look at our updated financial targets starting with the top line. So in terms of a new financial target or organic net sales growth, we have set ourselves with the task of achieving an annual -- average annual organic net sales growth of between 40% to 45% between 2020 and 2025, and this compares to the 60% we've guided to at the time of the IPO. Now that time periods past 2020 to 2025, and in light of the high organic growth that we had in 2020, you will recall we posted 74% organic and in 2021 we posted 69% organic growth. If we translate our new financial targets into what we expect to see for the period 2022 to 2025, so this year -- this year onwards, the revised financial targets imply a 30% average organic net sales if we look at the period of 2022 to 2025. So let me just repeat that. The current average annual organic net sales growth, that target of 40% to 45% between 2020 and 2025 implies a 30% average organic net sales growth between 2022 to 2025. All right. Moving on to the gross margin. Previously we had guided to a 37% gross margin. And now we're providing a range of achieving an annual gross margin of between 35% to 38%. And this reflects the span in the organic -- sorry, this reflects the span in the gross margin that we can see in an ad market that has less volumes like right now, but it also reflects the potential for upside on the gross margin supported by those lovely sales revenues that podcaster -- Podchaser are contributing moving forward. So we're delighted to see that come through in years to come. In terms of EBITDA profitability, we are now bringing this forward in terms of achieving EBITDA profitability in 2024. Our prior guidance was to achieve EBITDA profitability between 2024 and 2026. So we're bringing that breakeven in profitability target forward to 2024. In terms of the dividend policy, there's no change. Acast does not intend to pay cash dividends in the foreseeable future. No doubt there'd be a question or 2 on this down the track. But before, let's get back to our usual agenda and get some updates from across the business. So back to you, Ross.

Thank you, Em. Okay. So here's the big one. As you will no doubt have seen in the news, Acast has acquired Podchaser, the world's largest, most comprehensive and most authoritative podcast database. And here's Podchaser's CEO, Bradley Davis, to tell you a little more.

Hello. My name is Bradley Davis, and I am the Co-Founder and CEO of Podchaser. Brief background on Podchaser's origin. Believe it or not, it started on a Reddit thread 5 years ago. So my previous job was selling cardboard boxes and rags door-to-door to manufacturers. Super exciting. And because of that job, I was driving all day, every day and started falling in love with podcasts to pass the time and I felt like I had listened to every podcast in existence, which makes no sense. It's impossible. But that's how I felt. And so I went online, and I looked for some sort of discovery platform, something like IMDb and I didn't find anything. And so I went on the podcast Subreddit and I asked the question, is there an IMDb for podcasts? And if not, does anybody want to build it with me? And that's where I found our Co-Founder, Ben, all the way across the world in Melbourne, Australia. And we started building Podchaser. And so that was 5 years ago. Since then we've grown into the world's most comprehensive podcast database. We now track over 4.5 million podcasts, 17 million credits, hundreds of thousands of ratings and reviews, sponsored data on the top 5,000 podcasts, and a ton more for what is over 1.7 billion data points, which we're very proud of. So our team now also spans the globe. And it went from 2 people on Reddit to about 50 people across 12 countries and 6 continents. And throughout this journey, we've stayed true to our values of supporting podcasts' open ecosystem by remaining completely platform-agnostic, partnering and working with everybody, and giving podcasters the tools they need to connect with new audiences regardless of whether they're independent or with a big network. And so joining Acast was a no-brainer for us. Our missions aligned perfectly and as soon as we started talking to the team, we fell in love and it was clear our values were in sync. Their similar commitment to nurturing and supercharging an open podcast industry is obvious. So combining our joint mission with Acast's skill allows us to just keep doing what we're doing, accelerates our vision, and our efforts to build discovery tools, to help listeners and creators and advertisers get the most out of podcasting. And I'm very confident that by combining forces, we deliver the industry's richest set of authoritative structured data for everybody, and much, much more. We're very, very, very excited to get started.

Thank you, Bradley. Bradley and his team have built an incredible database from scratch, and we're really looking forward to working together. For Acast, this acquisition strengthens our position as the world's largest independent podcast company. And Podchaser is an important asset in our mission to continue driving innovation within the open podcast ecosystem, where podcasts are freely available on all listening platforms. Podchaser will offer our podcasters enhanced discoverability, helping drive their growth and monetization goals, our advertisers will benefit from superior performance metrics, enabling them to more efficiently reach their valuable audiences with access to data points covering demographics, consumption, reach and favorability. And finally, Podchaser's SaaS-based structure collects and monetizes data, adding additional revenue and strengthening Acast's own business model. So all in all, it's a move that we believe will set both companies up for long-term success. Throughout Q2, we've also focused on partnerships and collaboration agreements that strengthen our offering for creators. And in many cases, we're the first podcast platform to partner with these companies, making us the clear go-to podcasting partner and giving podcasters even more reasons to choose Acast over our competitors. We've made it easier for new podcasters to create content by partnering with both Podcastle, which is an all-in-one solution for podcast production, and the internationally renowned audio interface manufacturer, Focusrite. We signed a distribution deal with the social music streaming platform, Resso, in June. Resso is owned by ByteDance, the company behind TikTok, and Resso is a fast growing community for listeners in Southeast Asia and also Latin America. And so our integration will give Acast podcasters exposure to millions of potential new listeners and more of the global advertising market. We further strengthened potential revenue opportunities for our podcasters through a partnership with Spring, a social e-commerce platform for merchandise and other products. We also teamed up with Meta as its first podcast partner for the launch of its interoperable subscriber groups, allowing our podcasters to create exclusive Facebook groups for the Acast+ subscribers. Similarly we partnered with a company called Laylo. Laylo is a messaging and CRM platform for creators to further empower our podcasters. Acast creators will get access to Laylo's suite of audience engagement tools. And we also work closely with Apple to align on its delegated delivery tool for which Acast will be a launch partner. The tool will empower Acast podcasters to upload, manage and distribute premium content directly to listeners using Apple Podcasts Subscriptions. All of those partnerships helped us attract nearly 20,000 new creators to Acast in Q2, including some of the big names in podcasting globally. Those names include 3ShotsOfTequila in the U.K. and WTF with Marc Maron in the U.S., both of which have returned to the open ecosystem with Acast, having previously signed exclusives with other platforms. As Brendan McDonald producer of WTF with Marc Maron said, teaming up with Acast gives us creative control to bring our fans more benefits than ever on our own terms. We can't wait to unlock fan favor episodes and bring listeners new content on every podcast platform. And as Marv Abbey, host of 3ShotsOfTequila said, it's time to take 3Shots to the next level. With Acast, we're going to be bigger, and we're going to be on more platforms. That's really vindicating for us and for our business model. And it's great to see those shows making themselves available once again for all listeners on every listening platform. We also signed a deal with one of, well, if not, the world's biggest podcast, The Daily, from the New York Times to monetize its listens in the U.K. The Daily is the biggest show in existence globally when measured by listens. And yes, it even outranks that specific controversial interview podcast you may all be thinking about. As we've shown you before, if you measured Acast's reach and scale against key players in the U.S., you can see that we are neck-and-neck with Wondery in terms of U.S. reach and in terms of global downloads. This data was taken from Podtrac, which is known as the podcast industry's most respected ranker. Of course, all of that strong performance on the supply side means great things for the demand side. So let's take a closer look at some of the innovations for advertisers and how they help us offer the industry's most innovative ad targeting opportunities. First half in Q2, we began rolling out our new conversational targeting capabilities. We're using AI to transcribe hundreds of thousands of podcast episodes to enable better, more granular targeting, all while respecting listener privacy. And the uptake from advertisers so far has been incredibly promising, and includes a number of big well-known brands. Until now podcasters and their advertising space have mostly been tagged in relation to their genre, meaning 2 very different shows might be tagged and presented to potential advertisers in the same way just because they cover similar topics. With conversational targeting, advertisers are now able to target specific conversations within podcast episodes. That means they can align themselves with conversations that differ from the podcast genres or the episode's overarching theme. So for example, a sports podcast might usually cover the latest results or transfer gossip. But in one particular episode, it turns out the hosts are discussing cooking and nutrition with a special guest. That presents, of course, a relevant opportunity -- sponsorship opportunity for a food brand and one that may not be previously have been realized because the podcast as a whole was categorized under sports. So that's just one element of conversational targeting. And throughout the year, we'll be introducing new capabilities. Keyword targeting is the next innovation on the horizon and will allow us to go even deeper and help advertisers to be even more granular in their targeting, offering the ability to target towards and away from any episodes where specific keywords are mentioned. On one hand, this brings innovation to new levels of hyper-targeting, a brand being able to target every mention of itself across all podcast episodes as an example or to advertise against competitor mentions. On the other hand, it gives greater reassurance in terms of brand safety, allowing brands to explicitly target away from episodes mentioning specific keywords. Keyword targeting also offers the potential to think about ad inventory in a completely new way. An advertiser might choose to own the first mention of a specific keyword in future episode releases as an example. Besides from all of this rich first-party data, we continue to work with well-respected partners such as Nielsen to power third-party data audience segments, targeting audiences at a listener level. Then we have our curated collections. These are collections of podcast with similar audience demographics, packaged up together so that advertisers can reach more of the types of listeners they want to, but at scale, and there are over 40 of these. And of course, the acquisition of Podchaser further strengthens our advertiser offering at a show level. Podchaser provides trusted transparent data for advertisers and marketing professionals to more efficiently find and reach engaged podcast audiences, adding to the competitiveness of our advertising products and creating value for our advertisers. And now on to numbers with Emily.

Thank you, Ross. All right. So let's start by looking at our listens. You heard Ross mention that show growth that we've seen in the quarter, adding nearly 20,000 shows. So getting to that over 66,000 new shows. That acquisition has underpinned our strong growth in listens, which reached 41% in the quarter compared to same quarter last year. Average revenue per listen was largely flat on same quarter last year at SEK 0.26, but we see the potential for ARPL to increase over time. We see that on the right-hand side that listens were largely flat Q2 on Q1, so comparing those consecutive quarters. And that is a similar trend that we saw in the same 2 quarters last year. Still a really strong 41% growth in listens, which gives us that ample runway to continue to utilize our inventory in a better way moving forward as the ad market at one point in the future starts to catch up. So looking at our net sales growth, we did grow by 39% despite advertiser sentiment in the quarter. And all of our segments did contribute to the growth. We also had strong FX tailwinds and our organic growth for net sales was 28%. Of course, we see the usual seasonality patterns when it comes to Q-on-Q developments. Looking at our segments, North America remains our fastest growing segment. But as you can see here in the middle, and as Ross mentioned earlier, it has been hit by those one-off costs that we incurred related to podcaster contracts, more on those later on. If we start with Europe, we saw a solid 28% growth in Q2 '22 compared to same quarter last year. And we also saw some [indiscernible] scaling. So our contribution profits in Europe increased to SEK 35 million and we expanded our contribution margin to 17%. So that's just a nice piece of evidence that we are scaling well in Europe. In North America, we had 72% growth, heavily impacted by FX. So let's just make a note and that Americas grew by 54% at organic rates of exchange. That's related to the U.S. dollar compared to the SEK. In North America, we have made continuous investments, and that is why we're seeing that contribution profit moved to a contribution loss in the quarter, was also impacted by those SEK 18 million in one-off costs related to podcaster contracts in the U.S. Our other markets, this is mainly Australia, New Zealand, had solid growth of 48% and had a marginal reduction in contribution, profit sitting around breakeven mark. Now to the gross margin. We did have a gross margin of 30% in the quarter impacted by one-offs. And if you look at the right-hand side, you can see that we've had a very stable gross margin over the last 4 or 5 quarters. And that this quarter stands at 30%. So this SEK 18 million in one-off costs are related to a reassessment of podcaster contracts in the U.S. that run over longer period of time and which are affected by lower ad sales outlook. We exclude these one-off, the underlying gross margin in the quarter was 35%. So again, these one-offs are related to a revised ad market outlook. In terms of our operating expenses, we have continued to make investments in Q2. But to Ross's point, this period of heavy investment is now over, and we are moving towards a more limited pace of investment growth moving forward. So looking at the numbers, our other operating expense -- our operating expenses grew from SEK 172 million or SEK 143 million, excluding last year's IPO-related costs and improved to SEK 206 million in this quarter. Again, geographically, the investments that we've made over this period of time have been mainly focused in North America. And if we look at cost category, the investments have been focused on product development as well as sales and marketing. Moving on to EBITDA and adjusted EBITDA. Q2 2022 represents an inflection point for adjusted EBITDA and EBITDA margins. Let me just note that there's very little adjusted for in this quarter. We had around SEK 300,000 of cost related to the Podchaser acquisition, but there's very little difference between adjusted EBITDA margin and adjusted -- and EBITDA. So the adjusted EBITDA margin in the quarter was negative 31%, which compares to the negative 21% in the same quarter last year. And of course, the ad market sentiment, the reduced gross margin and our selective investments have impacted EBITDA results. But again, we repeat it. Q2 '22 represent a margin inflection point and we should see our EBITDA margin improve from this point forward. Of course, we'll have the usual seasonality fluctuations that we see in any given year, but from here on to 2024, we are on this path to breakeven and profitability. Looking at our operating cash flows, these were, of course, impacted by our losses. We also have had a small positive impact from working capital in Q2 of 2022 as we have improved our [indiscernible] collection, specifically in the U.K. So hats off to that team. When we look at our individual quarters on the right-hand side of the slide, of course, these have been impacted by working capital fluctuations quarter-on-quarter. And I should also flag that an adjustment has been made to our operating cash flows for Q1 2022 and Q4 of 2021 related to the movements in exchange rates and those details are not [indiscernible] financial report. No change to P&L. No change to balance sheet. No change to our cash position. That sort of summarize these set of results. I think it feels really good to have come past this inflection point for our EBITDA margin and that we have turned the corner. Back to you, Ross.

Thank you. Okay. So let's take a look at some of our more recent and soon-to-come happenings at Acast. Our international expansion continues with moves into Italy and into Singapore. In Italy, we have undertaken a digital launch, similar to how we have launched in Spain, supported by our international -- central international team, which is part of how we launch in new markets in an efficient way. Singapore represents our first on-the-ground venture into the Asian market, and we've hired a key account director over there to support our growth strategy, and there are a number of countries where podcast listening is exploding. Indonesia, as an example, has seen monthly listens grow nearly 350% in the past year. Coming soon is the next phase of our Conversational Targeting capabilities, which I spoke about earlier. The next update here will be a keyword targeting, allowing advertisers to target towards and away from any episode where specific keywords are mentioned. And finally, more and more of our very high-profile podcasters are launching paid subscriptions through Acast+. Those names include Marc Maron, Richard Herring and Sh*gged, Married, Annoyed. Their fans will be able to pay extra to things like bonus episodes and exclusive content, bringing them even more revenue and supporting the ad-driven payouts. June was our highest month ever for Acast+ revenue. And things are going from strength to strength. WTF with Marc Maron already has well over 1,000 Acast subscribers, while Sh*gged, Married, Annoyed had more than 400 sign-ups in just the first 24 hours after launching. So we're just getting started. Okay. On October 4 this year, we'll be holding a Capital Markets Update, focusing on Acast's business strategy, financial management and these updated financial targets. We're inviting all of our stakeholders to take part and will be running a live stream. We'll, of course, come back with more information regarding timings as well as the registration link in due course. I'm also happy to announce that I will be taking that call from New York as I'm moving there with my family in the next few weeks. We have always operated Acast as a distributed management team between Stockholm, London and New York, and we will continue that practice when I'm onsite in the U.S., but I'm, of course, also very happy to be working closely with our U.S. market and product teams in supporting their growth moving forward. I hope to see you all on the 4th wherever you are dialing in from. And that's it. Thank you for listening. We're now going to open up the floor for any questions you might have.

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

So I have a few questions here as it was a bit more to digest than usual. So first off, I was wondering about this one-off costs affecting gross profit. If you could give some details on what this relates to exactly in the U.S., what this reassessment actually means some -- and implies because I couldn't hear you properly there, Emily?

All right. So in terms of the one-off costs that we have taken, they relate to a reassessment of podcaster contracts in the U.S. And these are contracts that run over a longer period of time. And they are affected by a lower ad sales market outlook. So excluding those one-off costs, SEK 18 million that we took in the quarter, the underlying gross margin for the quarter was 35%. We have been a little bit more forward-leaning in our podcaster contracts when it comes to our investments in North America and in the U.S. And you will note that the reassessment is related to those U.S. podcaster contracts. So it's a little bit like any longer project. For example, you might see a similar impact in the building industry, IT industry, insurance industry, where you reassess your ability to make money and your obligations against the contract over a longer period of time. And when you make that reassessment and have a different year on the contract as a whole, then you think either an upside or a charge in the current period. Does that make sense, Derek?

Yes. I think I understand, but happy to follow-up on that. Yes. So secondly here, I was wondering on your updated long-term targets. How should we view your sort of assumptions around the macro scenario going forward here? I mean, this 40% to 45% targeted growth rate, is that something you think you will be able to actually [indiscernible] really prolonged weakness here? Or is that more of a best guess scenario? How should we view it?

So looking at that 40% to 45% average organic net sales growth rate, that relates to the period 2020 to 2025 and translating that into a forward-looking period, so 2022 to 2025. It implies an average organic net sales growth rate of around 30%. And that's given that we had really high growth in 2020 of 74% and in 2021 of 69%. So looking forward, the implied average net sales organic growth rate is 30% for the forward-looking period. And Acast does have a track record of doubling or tripling the market growth. So this is based also on how we have fared in the cost. So I don't know if you want to add any nuance to the ad market inflections there. Ross?

Yes. I think and obviously, we're seeing a softening of the ad market, and this has happened in different regions at different times. We signaled this back in Q1, but we believe we've got a good view moving forward. I think advertisers in this period continue to look at mediums that perform best in regards to ROI and podcasting has [indiscernible] been that #1 channel delivering ROI, which is why we've seen a great increase in host-reads. So I believe we've got a good view of what's going on in the macroeconomic environment right now.

And on -- related to this, on the advertiser behavior here, has anything changed or picked up over the last month there or so? Or is it hard to draw any conclusions here based on the summer months or -- and also if you could comment on the U.S., sort of what type of macro impact you're seeing in that market specifically as the organic growth rate was a bit lower than the prior quarter?

I mean, you know, some -- yes, I can take the first bit. Summer months are always relatively quiet anyway. But I think, as I mentioned before, we spotted that Europe was softening in Q1. And Q2, we saw more around affecting the North America region. So it has affected different regions at different times. But like I mentioned, we're comfortable in where we view the market at the moment. And if you want to add anything to that?

Yes. I mean we've had the visibility now on developments in North America. For many other companies, in advertising in North America, May was a tough month and the U.S. has reflected on 2 quarters of minimum GDP growth. And so we expect the prevailing market conditions to continue in the near-term in the U.S., and that is -- that's how we view the market. We're still posting 54% growth in this market environment. So I'd say podcasting is a wonderful place to be despite these macro turbulent times. It's really a medium that's holding up very well relative to other channels.

And finally, from my side, I was wondering on this interesting Podchaser acquisition. Unfortunately, the segment with Bradley was cut off there. But when do you expect to be able to sort of take meaningful advantage of having this data in-house? And can you say anything about what we should expect in terms of the impact on the ARPL, for example?

I think we've only just completed obviously on Podchaser. They've got a roadmap that they are following. We're already connected with Podchaser. We connected with them just under a year ago as well. So we're already kind of working very closely with them anyway. I can't really say any more about how soon and how quickly and how deep we'll be integrating moving forward. So we just are going to spend the next few weeks with them and working through kind of the roadmap and where we sit within that.

If I can add just a little bit -- on ARPL, Derek, I mean, the acquisition in itself was worked on ARPL, any SaaS style revenue. So the wonderful Podchaser revenues that are coming through, even though they're not material in the overall scheme of things right now, over time these SaaS revenues add valuable support to ARPL and gross margin, similar to how our Acast+ revenue behaves. So SaaS revenues, Acast+ revenues are, on their own, great supporters of gross margin and ARPL. And then, of course, we're going to work with Podchaser to help our overall ad machine become even more efficient, that would drive the ARPL when it comes to the ad inventory that we sell in general. So it will have a 2-pronged effect.

Yes, I think just from my side, I sort of interpret as that this would have sort of a pretty big impact on the overall ad machine and as -- I mean, it's still a fairly big acquisition for you and also the multiple is quite a bit higher than your own valuation multiple, so to speak. So it will be really interesting to follow that.

And the next question comes from the line of Dennis Berggren from Carnegie.

So just following up on growth throughout the quarter and if you perhaps could be a bit more granular. So for example, how June was developing compared to April? And also what does these readings mean in terms of expectations for the second half? Is the organic growth more likely to come down from here by an additional percentage points? Or do you expect it to sort of remain flat at the current level?