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

Good day, and welcome to the Believe First Quarter 2022 Revenues Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Dumont, CFO. And Mr. Ladegaillerie, Founder and CEO of Believe. Please go ahead, gentlemen.

Good morning, everyone. This is Denis Ladegaillerie. Thank you for joining us for this Q1 2022 conference call. Xavier and I will be presenting this morning we'll try to do about 20 minutes of a presentation and then open the floor for Q&A. If we can move directly to Slide 4, please. Essentially the highlight of Q1 2022 is the continuation of the strong strength of a strong trends that play through 2021, which is very strong attractivity for artists and labels across all geographies and segments fueled by investment in sales and marketing and central platforms that we've been doing. Moving on to Slide 6, please. So key areas for Q1 very strong attractivity to artists and labels, once again across all segments. You are noticed from TuneCore 2 mid-level artists all the way to the signing of new top artists; another record label number level of new signings of artists and labels. This is being driven by the investments we made in sales and marketing in building our local teams. As you know our model is focused on signing local artists and the signing of these artists are being driven by the investments we're making in local teams on the ground in each territory. And the investment we've made in the past, the investments we are continuing to make are fueling that attractivity to artists and labels. The second thing that is fueling the attractivity to artists and labels; as you know our target objective is to be the best development platform for artists in the digital world. Technology, innovation is playing a very important role in attracting artists. And a lot of the innovation we drove in 2021 that we're continuing to drive from that standpoint in 2022 and investments are continuing to drive artists' attractivity wherever that is Spotify for artists. A number of YouTube investments, playlists monitoring we'll speak about and plenty of other digital innovation are contributing to that attractivity for artists. So that that is really essentially our approach, which is very centered around digital and being the best at artists development in the digital world is what is fueling strong and profitable growth for us in all markets. Finally, we've continued deploying our CSR policy with Shaping Music for Good. Our program, as you know, with there will be strong focus on -- around gender equality, and I'll touched on later. Illustrating the trend on Slide 6 of artists signings, we put some of the few top artists signings that we've done there during Q1 and some of the top charting artists as this is obviously focused on the top. We also sign a record number of artists at TuneCore. So it is both a strong attractivity in terms of qualitative signings top artists, as well as artists that have strong ability to grow and as well as being able to capture a very strong market share of the new music trade or market with social platforms among other things. At the TuneCore level, which is contributing to growth. We've some of the results in the charts. You have a few results there, 2, maybe worth mentioning, [ Toulouse ] in Indonesia, which was the Top 10 Most Viewed music video in the world last month. And this week again, we have another Top 10 music video with Ryan Castro and Jordan and more and more Top 10 videos viewed globally on YouTube and contributing to fuel growth and the signings. One illustration; about growth and attractivity to artists and labels, and how we are deploying that growth strategy, and investment strategy; is China. In slide -- if you can move to Slide 7 that really illustrates what is driving our growth in one territory. We took China, we could have taken India, where we have a leadership position or Indonesia or other territories. The dynamics play the same way. Essentially, in a territory like China, we now manage a portfolio of 1000s of artists and hundreds of labels from very large local players like Modern Sky which is for example, one of the top local booking and artists development companies to top artists like Young Captain's here which is one artist that had more than 200 chart entries on the Tencent music platforms in 2021. This is being driven by investment in local sales and marketing teams, where if you look at the investment we've made there, we had 60 employees at the end of the year 2021 versus 10 less than 3 years ago. We're continuing to hire a significant number of people in that geography to be able to continue driving increase of market share in a market where 2 things are also contributing to growth. The first one is the growth, the accelerated growth of local platforms, TME, NetEase, ByteDance which are bringing in new users and accelerating paid user subscription, as well as renegotiation of our deals with these platforms. We announced a couple of days ago, the renewals of 2 of these deals with TME and NetEase with terms that improved on prior existing terms and so that therefore, contribute to increased monetization in the territory for artists. Moving on to Slide 8. Obviously, what is contributing to growth for us and attractivity is innovation. A few of the tools and the investment that we're doing in central platforms. As you know, we've announced a number of tools, social platforms was one innovative tool that we released as you know in TuneCore [indiscernible] so on the beta test for new pricing in a couple of territories and we expect to roll out globally in the coming weeks that will drive a strong innovation in terms of pricing and service that we expect will well further accelerate growth. We've developed additional tools now Spotify Discovery has continued to perform well for us and other tools. As playlist monitoring which allows us to monitor exactly what tracks are being put into playlist, at Spotify, at YouTube on various services. Whether that is the result of algorithm based recommendation or editorial pitches from our teams. And that is allowing us to improve our operational efficiency in promoting artists on these platforms. Last area of focus for us this quarter and in the past year has been the focus on Shaping Music for Good and gender equality. We announced recently the very high score of the French Index where we performed at 99% on the gender equality index. We took the initiatives and I do think that we're the only company in the world to have done that to actually expand that Index to all of our geographies around the world to be able to drive our efforts on gender equality in the same way and with the same criteria around the world. And we do think that gender equality in the long term is -- will also be a key driver for us of performance for the company. All of these elements -- turning on to Page 9, are translating into strong growth, revenue growth, for the quarter with group revenues up almost 31% in Q1 of this year. I would go further the more interesting number is even the growth on digital sales, up 35.3% year-over-year. This is driven once again across the geographies and across the businesses, artist services, label and artist solutions, TuneCore that all geographies businesses are fueling the growth. The non-digital sales were down 6.5%, as you know, reflecting the continued effort that we're doing in Germany to restructure our portfolio of physical accounts and the impact of the Russia and Ukraine crisis on our revenues that Xavier can expand on. Xavier, you want to expand on breakdown in revenues?

Thank you, Denis. So I'm switching to Page 10, sorry. So we are growing in all geographies and that growth is strength, the positioning of Believe in the most dynamic markets in the world in terms of growth, and this is where we invest profitably in sales and marketing capacities. For Asia Pacific and Africa is again the fastest-growing zone with 56% growth. As you know, Asia is going to be the largest recording market in the world in a few years. So it's an important market for us to take market share and to support our market positioning. The growth in the region is led mainly by the main market we enter region, which are India, China, Indonesia and Philippines, when you know that we made a -- strategic partnership last year with Viva. Second growing zone is France. France 30% growth, boosted by the 2 strategic partnership of last year with PlayTwo and Jo&Co. But France, even without those 2 investments is gaining market share on both artist services and artist label solutions. Americas is growing by 29%, driven by TuneCore performance and driven by our investments in South America. Europe, excluding France and Germany is growing 28% despite the impact of the Russian-Ukraine crisis. As you know from our press release, Russia in March has been declining by 20%. Our business unit has been declining by 20%. And as most international stores have stopped monetization in the country, and we will discuss that again in a few minutes, but we -- this is just the beginning as the situation is going to continue decreasing in the following month in the whole region. Germany, growth at slightly above 10%. This is the same phenomenon that we've seen in all the previous quarters, which is the restructuring of the portfolio, as mentioned by Denis. And we think that restructuring will still continue for the next quarters, and we -- until Q3 or Q4 of this year, probably. Now switching to Page 11. So the revenue growth by segment reflects the strong attractivity of Believe's platform for all artists and labels across all our segments and geographies, demonstrated by the organic growth of 31% and even 33% if we exclude Russia and Ukraine business units. So our 2 business lines, are -- just a quick reminder our Automated Solutions that -- where we address the music creators segment, which is mainly a subscription business, with very technologies and our second business line is Premium Solutions, when we address the need of artists and labels from emerging [ geographies ] and the monetization is driven through a percentage of revenue generated by those artists or labels. So now focusing on Premium Solutions. So Premium Solutions is growing at 30.7%, even 31.6% on organic growth. This is supported by positive market trends by again, market share gains in almost all our geographies. That growth also reflects the previous investments we made in our local teams. As you know, we've been consistently investing quarter after quarters for the past years in those geographies following not only the market growth but also gaining market share and extending our commercial offers in all the geographies when the market -- digital market is right. Automated Solutions' organic growth by 34%; so back to strong organic growth. You may remember that last year, we were -- we had very high historical levels back in '20 due to COVID. And so now we are more normalized in terms of [ 3 core ] levels. We have a very positive impact of the new discovery service on social platform that we launched last November. And that's allowing us to address the younger audience, which is a segment of the market, which is growing very fast. And as Denis said, we are also experimenting and testing into selected geography, a new pricing and new time service, and so that we will roll out in the next few weeks, and that's something that we will discuss in our next communication. Now switching to Page 13 about the guidance. So we are going to continue executing on the strategy that we presented at IPO and that we've been executing on in the past quarter. So first is to continue driving strong profitable organic growth. We think that we have strong business dynamics outside of Russia and Ukraine. And so we think that outside of Russia and Ukraine, the growth is going to be 25% organically. We think that we are going to benefit from positive structural market trends, and we will continue leveraging the attractivity of our global digital platform. And we are at the top of our range, when we communicated at IPO on midterm guidance. The Russia, Ukraine is expected to decrease between minus 30% and minus 40% versus last year on a full year basis, depending, of course, on the ruble depreciation. Our assumption is that the business is going to continue as it is operating now, which is monetization -- full monetization outside of Russia and Ukraine. But in Russia, monetization will be driven mainly by Russian local stores as most of the international stores do not monetize anymore. And the second part of our strategy is to continue investing in future growth while controlling operating leverage and cash flow. So we will continue investing in our central platform and our local sales and marketing teams as we can demonstrate that we are doing so very profitably. And of course, we will manage actively investment cycle in the current environment to make sure that our investments are paying off. So we think that the adjusted EBITDA margin would be around last year level at 4% as our priority is really to invest to build up market positions because digital music markets are maturing in various countries, and we are very well positioned to be able to reap the benefits of that growth. We are, Page 14, I'm not going to get into much detail, but let's say that we are confirming our midterm objective, which is a growth between -- organic growth between 22% and 25% for the period '21 to '25 and the mid-term adjusted EBITDA margin to 5% to 7% by 2025, which is a gross EBITDA margin as the long-term adjusted EBITDA margin of the group should be at 15%. So now I'll leave the floor to Denis for the conclusion of the meeting, and then we will have some Q&A.

Well, thank you very much, Xavier. I take it conclusion, key message there is about the future is essentially we expect the key trends of 2021 and end of Q1, which once again were illustrated in Q1 2022 to continue playing prove rest of Q1 2022, which is strong artist and label attractivity. One of the things I've been saying over and over again because it's a daily reality, every single day that passes the world becomes more digital and because we're a digital-first company that makes us more attractive to artists at all stages of their career, not only new artists, but also artists signed prior to traditional labels looking for a more digital partner. So we expect that attractivity to continue to play through 2022. And as Xavier just illustrated, we -- because of that opportunity and because of our ability to drive strong profitable growth, our aim is to continue investing, continue investing in sales and marketing to drive future growth, continuing to invest at a lower space in the central platforms to be able to continue to differentiate and be the best partner for artists in the digital world. And we do expect, as Xavier was saying is that, this will translate into strong growth, continued strong growth throughout 2022. Thank you very much. And I think now we can open the floor to questions.

[Operator Instructions] The first question is from Nicolas Cote-Colisson of HSBC.

Two questions for me. On the Ukraine and Russia, what is the running costs of keeping these assets until better days? And how do you keep paying employees, for example? And my second question is on sharing daily streams data from Chinese platforms to label and artists. How is it different from other global platforms? And do you see a trend for more transparency or more granular data received from platforms?

Nicolas, what I suggest is Xavier will take the first question, and I'll answer the second one, if that's all right. Xavier, do you want to take the first one?

So -- 2 part in your question, so how do we pay our people there. This is the structure we have in Russia as in any of our territories is that the financing of the local structure is made through contracts that the local structure has with Believe International. This Believe International is the company that holds all the DSPs' contract. And so as you may know, the bank transfers between with Russia are sanctioned, but only on a few banks, most of the bank transfer are possible. And so we finance the local operations through management contracts as we do for any other companies. The cost of running the business is roughly around EUR 3 million, EUR 3.5 million. And this is still a profitable business for us because even with the decrease in monetization, the level of business generated is still allowing us to be profitable in the country, even if, of course, the profitability is not at the same level as it was pre-crisis.

Thanks, Xavier. On the daily streams, I think getting access to the daily streams at NetEase, Tencent, I think is a good illustration once again of the fact that how Believe thinks differently about digital innovation and why we are a digital first partner. Why? We are the only company in the world today to be getting daily streams from TME and NetEase and making them available to our artist. Why? Because we think, one, getting that daily data is absolutely critical for us to understand the development cycle of our list. I mean, no one sells CDs in China. In China, it's all about driving streams on TME, on NetEase on ByteDance. If you do not understand, as an artist development company, how to develop these artists, then you're not doing your job. And if you don't access the data, you don't know how to do your job. So we started conversation 2 years ago with these companies telling them how important it was for us to get the data and why, as part of our contract renewal cycles, we wanted to get access to the data, and then we did what we had to do from a technology standpoint take people, integrate them, get the intelligence. This is one of the things for artists, I was mentioning earlier, like Young Captain's, why we are able to develop them because we understand exactly what it is that we need to do to drive increased audiences for them in the digital world. And I would say that very same logic plays in the same way, with Spotify, with Amazon, with Apple Music with all of the services where access to the data is a core condition of all of our licensing negotiations with all of these platforms. So this is something that we're driving with every single regions, with every single platform around the world because we do think it is absolutely core business.

The next question is from Tom Singlehurst of Citi.

Actually, one simple one and then a couple of more complicated ones. The simple one, I just wanted to just really pin down the guidance. So 20% organic growth. I know you talked about a sort of 2% boost from the strategic partnerships. I just wanted to check that, that 20% was also essentially the sort of constant currency growth, including M&A. I just wanted to make sure that was essentially the all-in figure for growth before any currency changes. That was the first question. Second question, a bit more sort of nuanced, I suppose. Can you talk about market share in developed markets? You're obviously outgrowing the major record labels in markets like France. But what I'm trying to get -- trying to understand is whether this is a function of, I don't know, the long tail becoming bigger? Or do you think there is an actual shift in share of listening from major record labels, artists to sort of DIY artists effectively? And then final question is, can you talk briefly about your ability to help artists in areas like publishing and merchandising, and whether that's something that they want and demand from you?

Xavier, you want to pick up the…

Take the simple one you get the other one. So 20% is organic growth, including Russia and Ukraine. And as you know, our organic growth include the boost from our strategic partnership and -- but exclude any currency variation.

So question on market share. It's a long answer, but what I would say, globally, there are 2 trends that will influence global market share. The first one is that as we've been saying all along, and we are continuing to send and this is why we're investing so heavily there, there's a geographic shift, Asia is going to be the #1 market in the world in 2027, 2028. This is why we want to establish a leadership position. If you look at -- and if you want to have that vision, just go on to YouTube, look at the top 100 most viewed videos on YouTube. What you will see there is very simple. There's 3 U.S.-based artists, 90 Asian artists and then maybe 5 or 6 or 7 Latin American artist. So the world is moving east. And so our target goal there is to establish market share position across all of these markets, where traditional labels have not been operating where they have low market share and where we are aiming for market leadership. I was mentioning Toulouse, Indonesian artist, Top 10 most viewed music videos on YouTube a couple of weeks ago. I could have taken a slew of other examples out of India or other territories. So market share will first be on a global basis, heavily influenced by the geographic makeup of the markets, and they are starting to shift at an accelerated pace. The second element that is changing market share, yes, when we do analyze for 2021 market structure -- what we see is that the top artist, the top 200 artists, top 500 weighed less and less. And there's essentially -- we are going in many markets in the direction of top artists weighting about 1/3 of the value of the number of streams and the value. The mid-level artists that are making a living weighting for 1/3 and entry level, which is typically artists generating from 0 to 10,000 dollar, euros, pounds in terms of revenues, weighting another 1/3 of the value. And when we analyze that market switch over the past 5 years, what you see is very simple, you essentially see value decreasing from the top and moving to entry level. With entry level gaining 5%, 6%, 7% market share, depending on the territories in the past 5 years only, and we're expecting that trend to continue because it is essentially being driven by fragmentation of audiences, driven by the way algorithm-based recommendation works, and that is the #1 driver of artist development. And once again, why we're investing so heavily on Spotify Discovery technologies and on digital marketing and promotion technologies because this is where artist development is happening. So yes, we do expect continued de-concentration of the market. I hope that answers your question, Tom?

The next question is from Christophe Cherblanc from Societe Generale.

First one was on Russia again. Just wanted to understand what's happening with the Western platform. I understand they're not monetizing any longer, but are they still operating, meaning that if I'm a Spotify user, can I still listen to, let's say, [ Viana ] in Russia? And are you collecting any revenues based on maybe some minimum guarantee contracts at this stage? The second sub-question on Russia was on exports. I understand there is some consumption of Russian music from -- by the [ Just for Laughs ]. So for instance, if I'm listening to Russian music in Dubai, is it still recorded as Russian revenues? That's the first part. The second question was on YouTube. We know that YouTube is your first client. Their growth has come down a lot in Q1, and yet you have accelerated. So it seems to suggest that the non-YouTube revenue have gone up very sharply. So is that the case? And maybe the last one is Denis, in the past, you have said that you were optimistic about pricing. Do you have any sense of the DSP starting to get their act together and maybe move in 2022, any color on that would be super helpful. And if I can squeeze the very last one, for Xavier. How do you operate in Turkey for your Turkish operation now because currency is collapsing, prices are going up. So net-net, what is the impact on your revenues?

Going to answer on the -- it's tough. You're very good at asking a lot of questions. Okay. I'm going to take the Russian ones and Turkish and then afterward I will leave Denis on the pricing part. So monetization in Russia. So the situation differs from one store to another. YouTube is still accessible but do not monetize, Spotify left the country, but you -- so basically, they don't take any -- they don't have any subscribers or they plan to go -- to have no subscribers in the following months. But with -- as far as we know, you can still listen to the music. And Apple, Apple Music, you can still subscribe to part, I think, I'm not sure because that's changing a lot, but you can still at least listen to the music. The export part, yes, the way we track our business is where the music come from. And so as long as you are a Russian artist, you are signed in all your revenue, worldwide revenue are allocated to Russia. So that means that in your example, yes, the revenue of Russian music outside of Russia is allocated to the Russian business unit and considered as export. Regarding YouTube, we saw strong growth in YouTube, both in our various geographies in the first quarter. And so yes, we know that overall, YouTube has been -- growth in the overall YouTube, they communicated that their revenue were not growing as strongly as they thought, on the music part and on the specific geographies. And given the fact that we -- our market share gain, the growth of YouTube has been quite strong and -- on the more or less the same trend in Q1 than in Q4, slightly below, but not by much. Turkey, I would say Turkey is the depreciation of the Turkish lira is something that has been happening consistently for the past year and along with inflation. And so we operate in the country as we are operating in all countries following the monetization by the DSP. So there is nothing specific in that country versus historic or versus other countries. We have local people. We monetize from DSPs. And the question, of course, of monetization in the country, is the question of the price of the subscription raised by the DSPs, and each DSPs have their own policies there following or not inflation depending on their commercial strategy.

Thanks, Xavier. Maybe just to complete -- to finish, I'll answer on pricing, but just to complete 2 things that Xavier was saying is one, in Turkey today, about 60% of our revenues like for Russia -- not like for Russia as the same percentage, but the same logic applies to Turkey as to Russia, which is for us, our Turkish labels today generates a very large, a majority -- a great majority of their revenues outside of Turkey, which means either U.S. dollar or euro revenues, where we're not dependent upon Turkish lira there. And Russia, just to complete what Xavier was saying, is Spotify has actually stopped music listening in Russia, is still present in Russia with podcast, not with music listening. So no more monetization there. Xavier was saying huge but still there in terms of usage, accessible for music, but no monetization. And Apple Music to some extent has found a way of recreating local monetization with carrier billing, rather than credit card billing with some level of success. On pricing, to answer your question, the -- you might have seen Amazon announced an increase of a number of pricing plans. We still expect other DSPs to follow in the near future with price increases.

[Operator Instructions] The last question is from [ James Tate ] of Goldman Sachs.

Two questions from me, please. Firstly, if the macro continues to deteriorate further, what impact do you expect to see on consumer spend on music? Are you starting to see users trade down their subscriptions or advertising revenue declining? And secondly, what are the key trends you're seeing in Q2? Is the organic growth in Q1 sustainable next quarter? And what will be the key drivers?