Believe S.A. (BLV) Earnings Call Transcript & Summary

Thank you very much. Well, good morning, good afternoon and good evening, everyone. Today, Xavier and I will be spending the next hour with you, and we're quite happy to do so for this first half year result for Believe. If we can turn directly to Slide 4 of the presentation. In H1 of 2021, Believe has experienced strong organic growth, driven first and foremost by our attractivity -- Believe's attractivity to a new generation of independent digital artists. We've grown across all segments of the artist market from entry to established top artists thanks to our unique model, allowing us to serve all of them. We've grown digital music revenues at the rate of 30% organically, which is about twice the rate of the market leader, driving strong global market share gains. Of course, as you might imagine, our growth is also sustained by the continued structural long-term market growth trends that we're seeing for paid subscription; the recovery in ad-funded monetization; and, as well, from the fact that we're positioned in Asia, emerging territories, Europe, the fastest-growing countries. The strong organic growth has driven a sharp profitable increase compared to H1 2022. From that standpoint, I would say H1 2021 has demonstrated the strength of Believe's model, which is a very simple equation: Fast growth plus controlled and continued platform investment equals strong operating leverage. And I want to emphasize that the growth in profitability -- the sharp increase in profitability has been done with a strong continued investment in local teams and central platform. So as a result of these 2 trends' stronger growth were -- that is driving us to uplift our 2021 guidance both in terms of growth and in terms of profitability. In the key highlights of H1 2021, I'd like to point out 2 other important elements. One, as you know, following the IPO, we have significant firepower now and do intend to accelerate growth with M&A, and we're engaged in several events discussions in key markets. And second element in H1 that is very meaningful to me and the management team is the finalization and the approval by our Board of shaping music for good, which is Believe's CSR strategy and key indicators and objectives. Turning to the next slide, Slide 5. What is driving our growth? Three things are driving our growth. The first thing is the ability to attract -- or Believe's ability to attract the new generation of independent digital artists. Once again, I want to emphasize that this is across all markets, and this is illustrated at the top with an increasing number of chart successes across territories, very high number of top 50 artists across a number of territories in Asia, in Europe. As an illustration for our French investors, I'm sure some of your kids have listened to La kiffance by Naps, which have been the top-ranking track summer hit. In the middle market, we've signed a record number of independent artists and labels in H1, very strong dynamics after -- once artists were able to go back to the negotiating table after -- with the COVID recovery and the strong growth with new artists at TuneCore and monetization with 28% growth of our Automated Solution in H1 2021. That's one, very strong artist attractivity. Second thing that's driving growth, our ability to retain and to grow our existing portfolio of artists and labels. In H1 2021, we renewed and we expanded an exceptionally high number of our largest label relationship to longer-term contracts, illustrating our ability to serve these labels best and build long-term relationships. Third thing is driving growth, our ability to develop artists and labels to the next stage of their career. An illustration, 340 TuneCore artists signed to Believe contracts, including, as an example, Charlotte Sands in the U.S. The bottom line is as all of the markets are becoming more and more digital, the attractivity increasing, this attractivity is fueling organic growth and translating into significant market share gains. Turning to the next slide. If we look how that plays across territories, what you see is very strong growth, plus 69% growth, across APAC and Africa. Two things there at play: very strong artist attractivity as well as recovery of the ad-funded markets in those territories post COVID. Very strong performance in other territories, rest of Europe. As you might remember, rest of Europe for us is very large. It covers territories like the U.K., Italy, Russia, Turkey and a few others; and strong growth in these territories, driven once again by strong market growth projections as strong local market monetization as well as strong acquisition of artists and labels in these territories. In France particularly, very strong growth at the very top of the market, acquisition of top artists and the development of new artists towards the top. So all across, strong performance. Only territories where we have slower growth is Germany. Xavier will address this a little bit more in more details. We are -- this is essentially due to the fact that we are decreasing the physical side of the business in Germany and to drive stronger operating leverage there. What is driving the artist attractivity? Moving on to Slide 7. Why are we attractive to independent artists and gaining market share? Very simply because a number of things, that we are the best partner for them to develop in the digital world. A couple of illustration in the slide. Digital music means digital artist development, and we do digital better than the traditional players. A couple of example. Spotify Discovery. Spotify Discovery is a beta product launched by Spotify in the spring to accelerate artist development and artist discovery. We partnered with Spotify to test the service. None of the traditional labels are partners in the program, and we built a dedicated technology platform, data platform to select the best artists for the program, resulting in 40% streaming growth for the selected tracks included in the program. Second example is short music video. As you know, short music video with TikTok is becoming -- and now YouTube Short is becoming a key driver of music discovery. As a reminder, we signed our deal with TikTok several quarters ahead of any of the traditional players, same thing for YouTube Shorts, where we participated in beta test with YouTube in India as one of their very few local players, and that beta test has since been expanded internationally with great success. Third example is Backstage Links, a marketing innovation that we released a few weeks ago that allows our artists and labels to easily manage and build relationship between fans and artists using links that are allowing them to collect data and drive audiences directly to the stores. This has been -- this was rolled out very recently with great success and good performance metric with an increase, on average, for the artist leveraging these tools and functionalities like pre-save. They can -- fans, when engaged, can presell their albums on services like Spotify that contribute to an increased factor of 2x in the number of streams they're generating. So all these elements are part of the -- of a suite of data and marketing tools and part of the investment we've made -- we started making in technology in 2020 that we're continuing in 2021 to be the best at developing and -- developing artist and marketing them. Last element on Slide 8. Key achievements in H1 2021 is with finalization of our -- and the approval by our Board of our CSR strategy, which is really aligned on our core value and the business model, centered around talent development; respectful, fair, transparent talent development across the territories as well as local team; and of course, environmental long-term impact as well. So we're very glad that this -- we've been able to move forward on this. Now to illustrate the trends I was describing, accelerated, stronger organic growth, increase of profitability, I will let Xavier illustrate more into numbers what I just described. Xavier?

Thank you, Denis. So as Denis said, I think the H1 financials are the perfect illustration of our model that rely on strong organic growth, along with controlled and continued investments in our teams, whether they are local teams in sales and marketing or whether they are in the central platform. And those led to an increased operating leverage, significant at the end of the semester. First, we focused on growing organically. In H1 2021, we accelerated our investments in local team and expertise. We ramped up local teams in most of our fast-growing markets such as Asia or Eastern Europe. We also deployed TuneCore, which form our Automated Solution offering in fast-growing markets such as Brazil, Russia and Southeast Asia. We -- as you know, we've been operating already in those markets, but we -- they were managed from the U.S. Now what we do is that we localize our offer both in terms of website, payment methodology, et cetera, so that we are capturing those emerging markets in terms of DIY artists. And of course, we keep increasing the depth of our digital services and solutions in our 2 segments. The payback on those investments that have been executed since '20 have been quite strong. Our organic growth compared to H1 2020 was plus 30% in Premium Solutions and plus 26% in Automated Solutions. Meanwhile, of course, we continued investing in a controlled way in central platform, in which our cost investment increased by 14% in the first year of the -- first half of the year compared to first half of last year even if it decreased as a percentage of sales. We also maintained a very controlled CapEx that has slightly decreased compared to the first semester of last year. And as you know, CapEx mostly consists in the central platform R&D. So that strong organic growth drove the profitability of the segments upward, and we now have a precentral platform EBITDA margin at 13% versus plus 9% last year, and we are closing to our historical levels. You may remember that we were at 16% in 2018 and 2019. So we are closing the gap to our historical numbers. And of course, at group level, that led also to a positive EBITDA with group adjusted EBITDA at plus 2.7% of revenue versus minus 2.8% last year. That is demonstrating our operating leverage. So if we go now to next page, on DMS and revenue. So you may remember that we are following DMS. That's our digital music sales. Those are the receipts that we get from the digital service providers. And we are operating 2 different models: the Automated Solutions model, where we pay back almost 100% of the digital music sales but our revenue are subscriptions; and the premium model when we take a commission on the digital music sales. So we -- the digital music sales and the revenue have been impacted by currency, specifically the USD-to-euro variance that is significant for TuneCore that reports in USD. And so what we see during this semester is a fast-growing premium segment both in terms of revenue and DMS. Premium Solutions revenue grew by 34%, out of which 30% organic, 4% being the effect of the perimeter mostly. That's the acquisition of DMC that we carried out -- the Turkish label that we carried out last year. TuneCore is fast growing in terms of revenue at 26% organic, so without the currency impact and thanks to the monetization model, but it's not growing as fast as premium on digital music sales. Automated digital music sales were very high and dynamic in H1 2020 as DIY artists were very active during lockdowns. And so the growth of digital music sales in the first -- H1 is less than in TuneCore. So it is less than the growth of their revenue, which amounts to 26%. If we go to the next page, you can see how the revenue growth is broken down between the various quarters. So we had -- you may remember that we had a very solid performance in Q1 at 26% growth, 24% organic. And as we discussed before, the revenue growth in Q2 '21 accelerated versus Q1. That acceleration led to a 39% growth in Q2 in total, 36% organic. That growth come from mainly the recovery of digital sales activities that were ad-supported and so impacted by COVID last year and, of course, the growth and performance of our roster, leading to increased market share in the various territories, specifically emerging and France. So overall, we grew 30% organic in the first semester, 33% in total. We will see in the next slide that we think that the market growth will decelerate in H2 because the COVID impact was very significant in Q2 last year and is [ weighting ] off for Q3 and Q4, hence the fact that the growth is going to decelerate. I know that some of you have requested if we could provide them with Q3 numbers. I'm pleased to announce that it will be provided in the next few days. We are still finalizing as we were concentrated on H1, but we will be able -- we should be able, sorry, to communicate Q3 revenue numbers in the next few days ahead of the next -- our next publication that is planned to be at the beginning of November. So if we get to next page, which is the free cash flow. So first, as a reminder, you know that we are operating under a negative working cap model, i.e., we pay the artists and labels after we get paid by the DSPs with the exception of advances that we sometimes pay. So the H1 2021 has a negative working cap variance. That is driven mostly by higher advances. Higher advances come from, first, the growth of our business and the continuing development of our artist service and artist solution businesses in several geographies. But it also come from high level of renewals, as Denis mentioned before, with large label on longer-term deals, which is a tribute of our quality of service and our model. We haven't changed the financial policy of our contracts, as demonstrated as a proportion of advances recoupable within 1 year, which is very stable in 2021, and as it was in 2018 -- '19, '18. And while we expect a lower level of renewals with large labels in H2 given the achievement in H1, we see customer advances remaining at a growing trend. And so we think that our change in net working capital will be amplified at the end of the year. As we mentioned before, CapEx is broadly stable versus last year, illustrating the controlled investments in our platform. So if we get now to next page, what it means for us in the next few months. First, given H1 performance, we are revising upward our guidance for full year 2021. As you know, we were prudent at the beginning of the year to give our guidance because we didn't know exactly how COVID was going to play out. And as we demonstrated, both COVID effect and our model proved to be quite successful in the last month. So we're now anticipating an organic growth at constant perimeter rate, constant rate at least at 23%. As I said before, Q3 and Q4 will demonstrate a marginally lower growth because of the market trends. And we do also expect that physical sales are going to decrease in H2 '21, mostly driven by the reshuffle of our portfolio that we are doing in Germany, where we are cutting contracts that are mainly physical-driven to be able to focus on the most -- more profitable, digital-driven contracts. Given higher organic growth, we expect a margin expansion compared to last year. And our guidance, previous guidance, what -- will be in line with 2020. We should be slightly above that level. But the expansion is going to be moderate because we want to continue increasing investment, specifically in our sales and marketing teams, as we're demonstrating that we are able to gain market share, and we are able also to be very profitable in terms of payback in our investments. Page -- next page is the midterm targets. I will not comment on them. They remain unchanged. I think we are in a good track to get to our midterm objective. And I will leave Denis to conclude the session.

Thank you very much, Xavier. So if I had to summarize, I would say H1 2021, I think, is very reflective of the strength of the business and our aim, which is -- and our key strength in building of the #1 global artist development platform. [ Primarily ], H1 demonstrated very strong artist attractivity that resulted into strong organic revenue growth and -- I insist on this, market share gains across all market segments. This was not growth only driven by market growth but also by the fact that we acquired more artists, more labels in all segments. We expect that trend to continue as the markets become more digital. Two, in H1 2021, we continue to invest in sales and marketing to drive future growth as well as in data and technology to build on our first-digital-mover advantage, innovate and support future growth. We expect to continue doing this. And as a result, we expect the operating leverage that has been demonstrated by fast growth, controlled investment in the platform to translate into increasing profitability while we still continue to invest. So H1, from that standpoint, very reflective of what we anticipate, and that gives us confidence -- strong confidence in the ability to achieve our mission, which is to build the #1 global artist development platform. Thank you very much. And we're opening now to questions.

[Operator Instructions] We have the first question from the line of Nicolas from Cote-Colisson.

Nicolas Cote-Colisson from HSBC. Two questions, please. Can I come back on the strong revenue slowdown in H2 based on your guidance? How do you reconcile this with your addressable market assumptions in terms of growth and also your market share gains? And I was just wondering, because you're referring to the impact of physical sales, should we expect Germany revenue to go down? And my second question would be around M&A because I'm a bit surprised that there has been no acquisition while, at the time of the IPO, you were very close to finalize some deals. So I was wondering if you've lost any bargaining power, having some hundreds of million of cash for M&A. Does it have an impact in terms of inflation in the assets and maybe your decision to buy or not to buy?

Xavier, do you want to answer -- address the first question on growth? And I'll answer the second one on M&A.

Yes. So thanks for your question. So on the 2 points, yes, we do expect the addressable market to lower the growth as there was some kind of a catch-up during the first half of the year. And so we do expect H2 is going to be lower even if the market share gain will be the same. Regarding Germany, as we are cutting some contracts -- so we do expect that the growth is going to be limited. And it's going to be limited for us, not only in H2, but it's going to be limited also probably in the following quarter. Of course, that will have a full year impact much, much later on.

Thanks, Xavier. And on the M&A side, the -- we -- as you remember, at the time of IPO, we had 7 targets under advanced discussions. All of these targets have moved forward into due diligence and towards deeper conversation. So we expect no -- there's no -- there's not been any changes related to competition or pricing. It is just a matter of properly ironing out due diligence with a target and the time just necessary to get the deal done and closed. And so we do expect the -- we do expect a number of -- to make a number of announcement in the relatively short future.

We have the next question from the line of Tom Singlehurst from Citi.

It's Tom here from Citi, and congrats on the results. I was wondering whether we could start by talking about France. I mean you talked about growth at the top end of the market. Can you just -- is that just because of the genre you're exposed to? Did you add particular artists? Or were your artists at that premium end, just a bit more active and that drove revenue? And I suppose what I'm really interested in is sort of gauging a sense of market share in a developed market like France. What -- whether your -- vis-a-vis the sort of traditional record labels you think you're taking share in the context of those sort of developed markets. That was the first sort of set of questions. The second one was you did say -- and I must have switched off for a second because I missed it, working capital for the full year. I can see that the medium-term guidance is unchanged relative to your original sort of views. But for this year, are you looking to recoup some of that in the second half? Or is that just a bigger-than-expected working capital outflow? I'll leave it there for the second. I might pop back into the queue in a second.

Thank you very much, Tom. I'll answer the first one and then let Xavier answer the second one on working cap. On the first one, there are, I would say, 2 drivers of the acceleration of attractivity at the top. The first driver is in digital music market segments, we've been very successful, which in France historically, has been hip-hop we've been very successful at breaking, building, working with top artists. And what we have experienced in the past -- I would say in the past 6 months and more importantly this year, is that artists who were previously signed to traditional labels have seen all of these successes. They have seen their revenues being digital, and they're now coming to us. So we now have signed more artists out of the traditional labels. We're signing more and more in these digital market segments, and that is part of the increase at the top. The second part of the increase at the top is that as we had anticipated, we are starting to see other genres of music become digital. French pop, pop music in France is now becoming much more digital, and we've been successful at building teams in these categories of -- in this new genre of music and same thing, develop artists, a new generation of pop and French pop artists towards chart success because the genre is becoming digital. So it's really the mix of strengthening the position in already digital music genres and then new music genres becoming digital, where we invested in team, started signing artists, driving success. And that is driving more -- that is what is driving market share gains at the top there. Xavier, on working cap?

Yes. And so on the working cap, we are not changing our long-term -- midterm, sorry, guidance on working cap because what we see today is that basically, the growth in the working cap that we are seeing are either because we strike longer-term deals with large labels, which is favorable to us midterm and because also, what we see is that we are growing our artist service and artist development -- sorry, artist solution, sorry, business, which is also a short-term impact but less so on the midterm. So to the question is, do -- as I said during my comments, I expect a lower level of renewals with large labels in H2. But I do see customer advances that are remaining at a growing trend. And I do think that the change in net working capital would be amplified on a full year basis versus last year but without changing our midterm guidance.

Perfect. And actually, if I can just ask one follow-up, actually, going back to Germany, I mean you talked about hip-hop. I know Germany does have a little bit more sort of legacy physical, which I think you referred to. But should we infer from what's happening in Germany that metal, which I think is your area of focus or one of the bigger ones -- just metal isn't digitizing at the rate that you thought it was? I mean is this a function of you -- that genre just not working out as you thought? Or is there -- is it down to specific artists or a specific relationship that are generally falling?

Yes. No. I would say, Tom, what we're seeing in Germany is the -- obviously, Germany and towards even in the spring still had what was affected by COVID and summer store closure in H1 and -- but more importantly, what we're doing in Germany as part of the businesses that we've acquired in the past, especially Groove Attack, there was part of the businesses where Groove Attack only had physical rights for distribution. For example, there's a number of large U.K. labels for which part of the business is -- was only physical. Some of these contracts -- what we are doing now is integrating operationally Groove Attack, and we're terminating some of these physical-only contracts where we see there is less value and focusing the business towards the top. So we're doing 2 things in Germany. One is pivoting that legacy business. And at the same time, we see the same trends as in France. So we see, for example -- so hip-hop has been very digital there. And we see schlager, for example, which is the equivalent of French pop, building up as German pop. And so we're investing into building teams there because we think we're going to see the same thing. Nuclear Blast on the metal side is on the same trend as what we were expecting, what we saw. Nuclear Blast is a slightly different business. I would say physical sales there are resisting better because they are very largely direct to fan and a little bit more like towards merchandising-type, higher-value products for that kind of audience. So it's really more coming from the restructuring I was talking earlier.

The next question is from Christophe Cherblanc.

It's Christophe Cherblanc actually. Two question on my side. One was on the mix. Can you give us a sense of the exposure to ad-funded revenues, how much it was in Q1, in Q2 and maybe a sense of what was the full year in 2020? The second one was also on the mix. I'm sure you saw that Warner Music was mentioning that -- what they call the emerging platform that is TikTok, fitness apps, social network, were about 5% of the revenues. I also saw that Hipgnosis was mentioning that it was -- TikTok alone was 6.5% for Sony Music, which seems very high. What is the share for Believe? And one last is maybe for Xavier. Your margin guidance, you had a very nice swing in H1, which is enough to have significant boost on the full year basis. So should we assume that 2 -- the second half EBITDA will be, on an absolute basis, flat or even down, not to have a good margin improvement?

So thank you for your questions. The first part is, did we increase the ad-supported streaming weight in the overall business of the company? Answer is yes just because last year, ad-supported business was depressed by COVID. It increased back again significantly this year. So -- and as you know, we are operating in emerging territories where a large part of the monetization comes from ad-supported business. So I would say our -- we're over-indexing in ad-supported business this year more than last year, definitely so. To the second question...

TikTok revenues percentage.

Okay. So I don't have the figure on top of my mind here. I wouldn't say that it's increased since last year. The TikTok and Facebook, et cetera -- or our contracts have been under renegotiation. We have increased. But as the rest of the business is increasing very significantly, I'm not sure that the weight of those social network stores have increased in our portfolio, but I can check.

Yes. So we could -- I don't have the number in mind, Christophe, as well. We can check the -- for us, what might be very -- what might be different, not in terms of growth, not in terms of weight. In terms of weight, we're definitely seeing these services, TikTok, YouTube Shorts, Instagram, which is really short video monetization, has become a significant revenue line. So the percentage is now meaningful, what we see there because we signed our deal. We signed our deal with TikTok almost like a year ahead of the traditional labels. YouTube Shorts was the same. For us, I would say the growth related to these revenues started a little bit earlier. So we don't have a bump-up effect that's late because we were early there, and we've seen the revenue growth with the monetization of these services. But no -- and we expect to continue to see them continue to grow. We have other similar deals in negotiations where our content is currently not monetized. So we do think that there's others that are going to come. And yes, like traditional labels, what we do anticipate, I would say, is this type of very specific music monetizations are going to increase as part of the revenue mix, whether it's TikTok, whether it's Peloton, whether it's Twitch, whether it's YouTube Shorts. That is going to be a more important driver in the future than it has been in the past.

And regarding the margin expansion, what we're saying is that, yes, we are increasing or are slightly above '20 level, our margin expansion. That's because we are -- we want to continue investing in our teams in sales and marketing locally because what we have demonstrated is that we have a very good payback on this, and we want to continue doing efforts here with 2 main targets in mind: a, to close the gap with the historical EBITDA pre-platform cost margin so that we close the gap to where we were in 2018 and '19 before COVID and before we started significant investment but, at the same time, continuing to invest to capture market growth in the territories where we are as that market growth is very significant. Hence, the fact that -- our view is that we have adjusted EBITDA margin that will increase but not at the same level as we demonstrated in H1.

So it's too optimistic to assume that H2 EBITDA will be EUR 13 million like last year. I'm pushing it, I know.

I'll leave you to do the math.

Okay. We'll do the math.

We have the next question from the line of Richard Eary from UBS.

Yes. A couple of questions from myself. Just going back to revenue mix, can you give us what the actual growth rates were in Q1 and Q2 '20, so we get an understanding of what you are comping to see obviously how that flows into the Q3 numbers? And just within that, obviously, you've -- you said you've signed the deals with TikTok and Facebook essentially ahead of the major labels. Are you now fully cycled out of that? And maybe if you can just expand on what are the mechanics of the deal. Are they revenue share based? Or are they absolute deals with inflators? So we can just get a sense of how we should think about the second half of the year particularly from the ad-funded side. So that's the first question. The second question just comes back to, I think, what people have been asking about working capital in H2. If you look to the -- or let's say, the free cash flow last year in second half, it was sort of like negative, nearly EUR 40 million. And so should we assume that, that is a similar number for the second half of this year with the investments you're making and, therefore, the full year free cash flow number is sort of more like EUR 70 million negative? So we just get a feel in terms of what the cash burn is within the business and any puts and calls around that. And I suppose another question within the working capital. Can you just talk a little bit more about the labels renewals and how they're going and what is happening in terms of pricing around that?

So on your first question on 2020 versus 2019, we don't have a comp because we changed accounting method between -- so we haven't quarterly 2019 figures. We are recalculating the 2020 quarterly. So there is no comp available between 2020 and 2019. Regarding the structure of the TikTok and Facebook contracts, they are fixed-amount contracts because neither Facebook or TikTok have their reporting systems to be able to report royalties and calculate royalties as the other stores do. They are going to get there, but they are not there yet. So it's more a fixed amount that we get.