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

Good afternoon, everyone, and a warm welcome to the presentation of Acast's report for the second quarter of 2023. Our CEO, Ross Adams; and our CFO, Emily Villatte will present the results and developments for the quarter. You can ask questions throughout the whole presentation by typing them in the text box below on your screen, and we will answer them in the Q&A session after the presentation. And with that, I would like to hand over to our CEO, Ross Adams.

Thanks very much. Hello, everyone. Thank you for taking the time to listen to our report for the second quarter of 2023. In case you're new to our calls, my name is Ross Adams. I'm the CEO of Acast. I'm based out of New York. Our CFO, Emily Villatte, and I will take you through the numbers and events for the past quarter. The second quarter of the year has been marked by a continued improvement of our results with a positive revenue development, especially in North America. During the second quarter, Acast grew by 22%. The organic growth was 15%, an improvement compared to the first quarter of the year and a positive indication in an advertising market that continues to be difficult to assess. The gross margin amounted to 36%, a significant improvement compared to the previous year and the gross margin was negatively affected by one-off costs linked to certain podcast agreements. In addition, stable development of all of our products and increasing share of SaaS revenues from Podchaser contributes to an improved gross margin and the EBITDA result improved for the second quarter in a row, and we continue on our path towards positive EBITDA in 2024. ACast is the market-leading independent global infrastructure platform in podcasting. We're uniquely positioned in the center of the podcasting value chain, connecting advertisers with podcast creators who want to monetize their content and their highly engaged audiences. Through our work on building the world's most valuable podcast marketplace, we have achieved success in generating substantial revenue streams from our marketplace. In the second quarter, we continue to strengthen our position by introducing several product improvements and launches that not only enhance our platform, but also deliver long-term benefits to our valued stakeholders. By automating the ad buying process, we create higher cost efficiency. At the same time, more opportunities are created for advertisers to reach an engaged and valuable podcast audience. Programmatic ad buying, which allows podcast ad buyers to book ad campaigns efficiently and in real time through the Acast marketplace continues to be one of our fastest-growing sales channels with positive development in the second quarter as well. Acast self-serve ad platform has had a promising start since launching late last year and it continues to show good results in the second quarter. The number of book campaigns is up 40% compared to the first quarter and we're also seeing an increase in new advertisers who use the platform. Additional to this, almost 40% of all advertisers have made repeat bookings proving that their campaigns booked through the platform are delivering results for them. So the work to automate our services and reduce manual sales work continues. Our ongoing efforts to enhance our self-serve platform exemplified our continuous drive to increase automation in our operations. With the introduction of host-read sponsorships on the platform, we have significantly expanded opportunities to advertisers. They can now independently discover and purchase relevant host-read sponsorships from across the entire Acast marketplace, marking a significant improvement in our offering. By now adding host-read sponsorship to the platform, we further leverage our large and growing base of audio influences. The launch position is Acast as the largest podcast network to enable self-serve ad buying for host-read sponsorships. During the quarter, we also introduced Acast+ Access, an innovative technology that enables companies with existing paid subscribers and subscriptions to incorporate podcasts into their offerings. The functionality allows businesses ranging from news publishers to major organizations and streaming services to seamlessly integrate podcast into their existing payrolls, thereby augmenting their membership benefits. Prominent media brands including the economists are already making use of the product to great effect. By doing so, Acast+ Access effectively increases the value proposition of subscribers by enriching the depth and variety of content available within a single subscription package. Acast owns a fee for each private podcast feed activated by their clients paying subscribers. After acquiring Podchaser a year ago, we have been working hard to build even better solutions that create value for advertisers, listeners and podcast creators across the whole industry. A good example of Collections+, which was launched in the second quarter. So far, we've enabled only 300 brands to run maybe 800 campaigns across thousands of podcasts in our marketplace using this technology Collections+. Collections+ is an AI-powered data capability, which increases advertiser reach in podcasts. Data about podcasts and their listeners is pulled from a very broad range of sources including Podchaser’s own data as well as an industry-wide intelligence. The data was then processed using AI models and podcasts are sorted into richer and more relevant sales verticals based on all available data points. It gives advertisers the opportunity to reach more relevant listeners through a wide variety of podcasts. For Acast, Collections+ creates a unique opportunity to combine Podchaser highly detailed and industry-leading podcast data with Acast proprietary marketplace. It helps us scale up ad sales and monetize more podcasts, especially the midsized ones with a lot of untapped potential. We're already seeing a positive trend. Collections+ allowed our marketplace to monetize more shows during the 7-week trial than it normally does. By combining Acast and Podchaser's data, we will also reduce our reliance on third-party data providers giving some increased cost efficiency. We are proud to become Higher Ground's exclusive partner for managing ad sales and distribution of their premium podcasts. We did tell you about this during the presentation of the first quarter, but since it actually happened in the second quarter, I'm actually taking the opportunity to tell you about it again. In April, Acast teamed up with Higher Ground, which was founded in 2018 by President Barack Obama and Mrs. Michelle Obama to tell powerful stories that entertain, inform and inspire whilst elevating new and diverse voices in entertainment. Higher Ground produces some of the most popular and iconic podcasts in the industry, including Michelle Obama -- Michelle Obama, The Light Podcast, Renegades: born in the U.S.A. with President Barack Obama and Bruce Springsteen and the Michelle Obama podcast; Tell Them, I Am. Alongside such important new partnerships, we are continually strengthening our existing relationships with our largest podcast, which hold a lot of appeal to advertisers. Here is just a snapshot of some of the creators across the U.S., U.K. and Ireland, Sweden, Australia and New Zealand that have renewed agreements with Acast so far in 2023. The podcast shown here alone represent over 36 million monthly listeners in our marketplace. This evidence is the depth of our relationships with our creators and the high levels of satisfaction, we afford them across monetizing and growing their shows as we continue to focus on monetizing the inventory we have. I'll now hand over to Emily, who is going to walk you through our financial performance for the quarter in more detail.

Thank you, Ross. Let's have a look at the numbers. Now listeners grew by 40% -- by 4% compared to Q2 of 2022 as a result of the business having an increased focus on monetization of existing inventory. And these efforts resulted in an average revenue per listen or ARPL growing by 15% to SEK 0.3. And we can, therefore, conclude that the monetization of our portfolio podcast continues to improve. Looking at revenues, these grew by 22% in the quarter despite mixed ad market sentiment, which means that we doubled our pace of growth compared to Q1 2023. Our organic growth was 15% in the quarter as Podchaser contributed some 2% and FX contributed around 5% to reported revenue growth. When it comes to our segment performance, our growth came mainly from North America and other markets. And let's start with North America, where net sales increased by 31% and profit contribution margins equally so an improvement to a negative 12% compared to the net 34%. We have no net gap in the second quarter last year. You will recall that growth rates in North America have moved both up and down over the last year more quickly than other areas. And we're happy to see North America back in solid growth. Other markets delivered 35% net sales growth and a marginal increase in contribution to profit. Europe is also holding its own considering a more subdued prevailing advertiser sentiment in this region and Europe delivered 17% net sales growth in Q2. And Europe's profit contribution margin also increased compared to Q2 of last year and is now at 22%. Our gross margin in the period was 36% and SaaS that other non-ad revenues of Podchaser continued to contribute to the gross margin in the quarter. The gross margin is stable compared to the Q1 '23, but an improvement on the gross margin of 30% that we saw in Q2 of 2022, which you will recall, as Ross noted earlier, was impacted by some podcast contracts in the U.S. And I'd like to think that we were transparent and we're coming and working around this podcast contracts. Now operating stats. This decreased by 4% year-on-year overall. And note here that the Podchaser acquisition was done on the first of August of last year, and hence, Q2 2022 costs do not include Podchaser operating expenses. In this quarter, Q2 2023, these costs amount to SEK 9.5 billion, without which the cost reduction year-on-year would have been negative 9%. Following the reduction of stock in Q3 and Q4 of last year, there is ongoing focus on cost efficiency and you'll know staffing has continued to see a small reduction. So under the hood, we're managing our fixed cost while making deliberate decisions around discretionary spend to support our growing business. In the quarter, EBITDA improved to negative SEK 42 million compared to the negative SEK 99 million in the same quarter last year. And the EBITDA margin of negative 11% compares to the negative 31% in the same quarter last year and is therefore an improvement of some 20 percentage points. A quick note on items affecting comparability. We've not had a habit of adjusting for the loss of share-based compensation and our historical costs related to podcast guaranteed contracts have been deemed operational, not exceptional. Historical adjustments that have been related to our IPO costs and the reduction in force undertaken last year. And you will have noted that we have no adjustment items in quarter. So to conclude this slide, we pop the profitability, full year 2024 remains firmly on track. Moving on to cash. We can report that our balance sheet remains strong and our cash flow from operating activities improved to negative SEK 58 million in the quarter compared to negative SEK 98 million from the fourth quarter last year. The quarter did see a negative impact from working capital movements, which I think is natural given the 2 prior quarters, which were very strong came to the cash flows. So the cash balance at the end of quarter was SEK 801 million. So we are well financed and our cash position will take us through to EBITDA profitability in 2024 and also on the future cash generation with a comfortable margin. So with that in mind, It means I actually got a pretty good night sleep at night. Ross back to you.

Thank you, Emily. So it's almost been 1 year since I moved to the U.S. and I'm pleased with the progress we're making and momentum we're building in this market. Please do keep an eye out for future announcements. We have coming very soon. We're also continuing to focus on driving sales and efficiency in our ad operations and we'll be rolling out more tools, which support our automation and efficiency goals. Now let's go to the Q&A. So if you want to post a question, feel free to type in the box below.

And we have a first question here. Please elaborate on metrics that remaining number of lessons, modest 4% growth, how will this improve over time? And how can this be influenced by Acast.

I can pick that one up first and if you have something to add Ross, please feel free. We've had a deliberate strategy of improving the monetization of our existing portfolio. If you recall the numbers that we disclosed as at the end of 2022, that included our sell-through rate of our portfolio. And the sell-through rate as at the end of 2022 was just below 30%. And that means that in this market, we've taken an active position to make sure that we deliver all the promises to the portfolio that we have and that we approve [indiscernible] of the listens portfolio that we currently have. And we saw that in Q2, as we improved our average revenue per listen to SEK 0.3 compared to the SEK 0.26 we saw in the same quarter last year. So we improved our monetization by 15%. And we're anticipating that in the foreseeable future or revenues, it should be growing faster than our listens to continue to grow into our suits and continue to monetize our portfolio in an effective way.

Great. Thank you. We have a few questions from Derek at ABG. First one, could you break down the strong performance in North America based on, for example, tailwind from somewhat improved ad demand, execution on adjusted strategy, demand for specific shows, more broad-based, et cetera.

Of note that the growth in North America is both aided by some positive macroeconomic and data costs. That is helping advertisers make more forward-leaning decisions in terms of deploying their spend. But I'd also argue that this comes down to strong execution of our narrative activities in the market. Ross if you want to add anything.

Yes. So I think for us, it's definitely how we've executed our strategy. But also I think it's a multitude of things, signing the content we have, as I spoke about last quarter, audience buying becoming a trend, which Acast is incredibly well suited for. All these kind of things together, the focus I've given on the U.S. market need being here has really helped us excel in this market with the team here. So all around. It's a great execution and the continued execution of our strategy.

Good. Next question from Derek. Could you give a rough breakdown of the non-ad revenues between SaaS and subscription?

We haven't broken down these earlier, but we note in the quarter that SaaS revenues and non-ad revenues in total makeup just over 10% of our revenue in total. So SaaS of the non-ad revenue line is now over 10%.

Yes. Two more questions from Derek, how has Q3 started and which individual European markets contributed the most to growth in Q2?

I mean, Q3, we don't comment and give sort of specific guidance on this quarter, but we've seen based on Q2, we have had some very positive indications in North America, but it is a market that continues to be fast moving. So we're continuously monitoring developments closely, of course. In our European markets, we've seen strong support from some of our smaller markets. But everyone has given the macroeconomic circumstances delivered well including our U.K. and Swedish operations, which are the 2 biggest markets in Europe. But in terms of growth, we have had the benefit of smaller markets that supporting the overall growth in the European region.

Great. There's actually one more question from Derek at ABG. Could you remind us what the Amazon revenue is classified as. And how much did it contribute in the quarter roughly?

We don't break out the Amazon revenue, but it's in our non-ad revenue. So it contributes to 10% of SaaS and other non-ad revenues I have spoken about. But I'm not going to give specific details on the contract in the quarter.

All right. We have a couple of questions from [indiscernible], first one being, what are the main drivers towards positive EBITDA next year?

I think the main drivers next year are similar to the drivers that we have seen in this quarter and that is revenues growing faster than cost as maintaining stable and strong gross margin, of course, supports this but we are in a market that is still growing. Podcasting is growing faster than the advertising market overall and underpinned by the diligence and cost management that we have implemented across the business, a growing top line and tightly managed cost line is what gives us confidence that we're going to deliver positive EBITDA in 2024 for the full year.

Great. Second question from [indiscernible]. Do you believe the SaaS offerings will continue to advance in terms of its revenue share for the group. Do you have any targets here? And can you say anything about gross margins for the 2 SaaS offerings?

SaaS offerings are typically in the 80% or 90% gross margin category and our SaaS offerings typically in that space as well. We haven't set any targets for our SaaS or other non-ad revenues, but we will continue to monitor and give more disclosures around this and if and when this share of growth of time cost.

Good. We have a question from HPO. How is the roster of pod shows developing? Can Acast offer guidance on available shows by year-end?

In terms of the number of shows, we haven't had an increasing number of shows. We actually have 106,000 shows as of the end of the quarter. But given the fact that we have so many shows in our podcasting network and we have a great availability of inventory at this point in time, we don't feel that it's a sort of mainly the indicator in terms of our potential growth at present time. We have a lot of runway to go in terms of podcasting, the listens on the shows that we have. But having said that, we still have positive growth on shows in the quarter. But I see you're very diligent in picking up that we didn't report on this specifically in the market place slide well noted.

I think I can add to that as well that obviously the roster is to developing well in each and every market for us. We continue to attract great shows. And as we showed today, we are resigning and renewing fantastic shows as well. So the roster is developing well.

Good. We have a question from Swen at AIP. You still have a lot of cash at the balance sheet. How much will you need for operational use over the next year?

We haven't given guidance on cash. What we've said is that the cash that we have will take us through to positive EBITDA in 2024. And beyond that will also take us through to delivering a business that is generating cash with a good and comfortable margin. So we'll leave it that at the present time, but we're very comfortable with our cash position, as you have also noted this fund. Thank you for the question.

Yes. You are working with the first part, have another question. Do you think gross margins over time might go up when automation becomes more important through self-serve Collections+ conversational targeting and so on and perhaps when SaaS also becomes larger?

I mean those are the dynamics, right? If we sell more of our midsized and smaller shows and penetrate the full tail of over podcasting portfolio. In theory, that can support an increase in the gross margin. Of course, SaaS revenues potentially taking a larger share of revenues but also in that scenario support the higher gross margin. But gross margins can also be dependent on the cost of contract and negotiations with major podcast partners. And we'll note that in an ad market that is buoyant and producing a lot of growth, the competition for content increases whereas right now in the market that we're in. We're seeing a slight decrease in that competition, which was so favorable to gross margins. But overall, we have given guidance on our gross margin in the range of 35% to 38%, and I'm happy that we're comfortably within that range at a time.

Great. There are no further questions right now. So I suppose I'll then hand over to you, Ross.

Great. Thank you, everyone. Thank you for the very engaged questions there. Don't forget to follow us on investors.acast.com or our Acast blog or listen to our financial results, of course, as podcast. If you want to receive company data continuously to your inbox, please subscribe to press releases, news and financial reports on our Investor Relations website. Thanks very much and see you next time.