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

Good afternoon. This is the conference operator. Welcome, and thank you for joining Believe First Half 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Denis Ladegaillerie, Founder and Chief Executive Officer. Please go ahead, sir.

Thank you very much, really appreciate it. Well, good afternoon, everyone. We're delighted to have you for this call to cover our H1 2022 performance, which is a very strong performance. And as you can see on the first slide that makes us a strong accelerated organic growth in Q1 and Q2 and higher H1 increased profitability as well as positive free cash flow. So overall, a very strong first H1 performance. You can move on to Slide 4. That strong performance essentially illustrates the strength of the model where believes, once again, continuing to drive growth by market share gains at all market segments, entry-level artists with TCAR, mid-level, top level artists across all other segments and all our strategy, the first driver of performance is the ability to both sign new artists and labels as well as continue growing at a very fast pace, our existing portfolio of artists and labels. This was supported through H1 in both in Q1 and Q2 with very strong market growth, both on the subscription side and advertising side. And as illustrated, increased profitability is really resulting from the scale effect in a number of territories. We have demonstrated from a sales standpoint, so many successes that successes is attracting success when we develop key artist that is driving key artists to us and accelerate it, contributing to accelerated growth, and we're seeing these dynamics play in a number of territories. And obviously, with faster growth and continued investment in local sales team and in the Central Platform at a lower rate, that is as in the previous quarter, increasing profitability and operating margin. Last important element in H1 is the continuation of the rollout of our shaping music for good program with a focus on key change and in a way that is very consistent with how we operate the core business. Strong growth moving on to Slide 5. As you can see there, growth has accelerated pretty much in all quarters since Q3 2021, all the way to Q2 2022 with accumulating in Q2 2022 with a 39.4% growth rate in the quarter, a growth rate that is even higher on the digital side, as you know, is the most significant revenue sources for us with a growth rate of digital revenues up to 40.1%, significantly better than the market, which is an illustration of our ability to continue gaining share as we have. Moving on to Slide 6, that gain of market share is happening with the mid-level markets, both on label and artists as well as a top of the market on artist services. A couple of illustrations and some of the things that we've seen to estate in the U.K., for example, we've had in Q1 and Q2, more top 10 billboard charted artists than we have had in the past with one example, Knucks in Hiphop, which was previously signed to one of the major record labels that signed to us and which we took to #3 billboard charts in the U.K. We also had a couple of #1s during the same period. And with a very strong diversity of artists, of course, notes as the up in the U.K., I could take the example of Tulus, which releases an Manusia, Indonesia earlier that went to -- on the week of release top 10 most viewed music videos in the world on YouTube and a number of artist across geographies from Romania to India and labels that are illustrating the diversity of artist. What you see there is both a mix of regional Mexican artist as well as some on tracks companies like hits, for example, in India. So this is the strength of the middle diversity, our ability to sign and develop artist and labels across geographies at all levels that is really powering our engine for growth. This is not just about the top. Obviously, the top is contributing more and more. But globally, the diversity, the breadth of signings that we're making across alternative music and across all geographies. Moving on to Slide 7, a quick focus. That strategy, as we know, a core part of the strategy has been more and more as markets develop, signing artists and developing artists to the top of the market with artist services. As a reminder, parted services believe is deployed on artist services only in 14 countries around the world with many of these countries where we are still in investment phase, having deployed local teams organically, as you know, our model, we follow a very standard blueprint of development of building teams first in Wonder of music with 4, 5 people and then establishing success with signing mid-level and emerging artists that we take to the top. And then once we have demonstrated success, once we have achieved target EBITDA level for these initial teams, we then move on to building additional teams. And so as you know, we've been artist services, building a lot of these teams around the world in 14 countries with a lot of success. We've had in all of the markets that we are operating right now with at least one number #1 in the top 100 in each of these geographies. And obviously, in geographies like France or Germany or India or Indonesia was just taking as illustration, which will be large order services market. This is not one artist in the top 100. This is 15 to 20 artists that we're able to take in these markets and competing at the very top of the market. As you know, that strategy there is a mix of building up organically as well as making targeting acquisitions to complete when we feel new segments are becoming more digital. And obviously, as I was illustrating earlier, as the market is getting more digital every day, our target market and addressable market are enlarging and this is one -- the reason why we're continuing to invest in building local teams as a core part of our strategy. The -- another segment, moving on to Slide 8, where we have seen strong growth in the first half of the year is the segment of new artists, where with the launch of a new pricing model, we've been able to see the early signs of accelerated growth. We launched new pricing into territories for a couple of reasons. One was to a larger addressable market with 4 tiers, starting with a free tier for the new generation of numeric creators that is very large in terms of numbers with some of these creators making it progressively to the mid-level on the top that we are then upselling to believe artist services or label and artist solutions. The relaunch of that new pricing has been -- has received very strong positive feedback from the artist community. This is very aligned with how one, the increase of the number of music creators. The fact that as we analyze the market, that segment of music creators is capturing every year, year after year, more and more dollar value and streaming value in many markets. Now that segment is capturing between 55% to 25% of the volume of streams in the market, and this is why this remains a core area of investments to -- for us and launching with a new pricing with artist releasing tracks on a very regular basis is really in sync with what artists in that market segments are requesting. And where we are also seeing there the benefit of some of the especially traditional players playing in that market that recently decided to pull out of the market, creating more opportunities for us. So really strong H1 2022 growth, which we expect to play through for the rest of the year. Last area focus for us has been on Slide 9, continuing to build our CSR strategy. As you know, our CSR strategy and as is illustrated on the right-hand side of the slide has really been thought to be truly aligned web the sense of our model so that it actually supports our economic model, 2 initiatives to point in the first half of the year, believe and to core funded the expansion of U.S. organization of Keychange, which is a global non-profit organization that is fighting for gender equity and supporting underrepresented artists. And we've seen already we're measuring some KPIs, especially around diversity under the number of women artists, female artists, which we've seen grow significantly due to a number of efforts that we've done in this area. And the publication of the MIDiA research “BE THE CHANGE: Women in Music,” which is a study meant to be able to measure the progress in the industry, both in the industry as well on the creator side so that we can contribute as a company to progressively help the industry generally and us alleviate these barriers and make for a better, more diverse, more balanced work. And so that is, once again, that remains a core private for us. So in summary, and I'll be brief and let do expand great performance in H1 2022, very line in how we've been what we communicated at the time of the IPO and with what we've indicated would be our core model and where the growth would be coming from. Xavier, you want to jump into the numbers?

Thank you, Denis, and thank you all for connecting to occur. So the H1 '22 demonstrates, as Denis demonstrated, the performance of our model. We are driving profitable organic growth quarter after quarter at a faster rate than the market, and we leverage our model to increase the digital monetization for our labels and artists. That translates into, of course, a very strong digital focus. Digital represents 92% of our revenue and a very strong digital revenue growth, we achieved at almost 38% for this semester. That leads to a very strong organic growth at 35.6%. And that organic growth comes from the fact that we are investing very consistently in a very profitable and controlled way. We deployed new solutions and new teams that leverage those solutions. And these solutions are a mix of technology and services to help artists and labels to grow. During the semester, we increased again our EBITDA margin by almost 50 bps while continuing the investment. And we have a positive free cash flow of EUR 10.8 million in H1 '22. That is driven by a positive working cap and improved profitability, and we will get back to that in a moment. So going to the next Page 12. As Denis said, the Q2 growth was stronger than Q1 Organic growth in Q2 was 39.4% versus 31.4% in Q1. Premium Solutions accelerated its growth to 40.2% in Q2 despite a slowdown during the month of June in ad-supported monetization. And that performance was achieved, thanks to very strong market share gains in all major DSPs and also positive non-digital sales in Q2 versus Q1. The debt performance was also achieved while Russia and Ukraine revenue growth slowdown activities have been more limited than expected due mainly to the strength of the ruble during the semester. Automated Solutions grew by 28.1% organic, which is the same growth in Q2 than in Q1, if we exclude the Russian and Ukraine impact. As presented by Denis, TuneCore benefited from the rollout of several new commercial offers that allowed 2 core to enlarged addressable market and fuel the future growth of this business unit. Going now to Page 13. So what we see Page 13 is that demonstrate the way our model works, which is that we focus on the geographies that have the stronger market growth, and we deploy our model to build very strong market share as indicated by Denis in each of these geographies, we're pigging on the fact that the digital market are enlarging. So our key geographies are Asia and Europe because those 2 geographies would be the 2 largest music market in a few years. So all -- we are gaining market share in all our geographies, including in Germany, where we have very strong and market share gains on digital markets. And even if, as you know, the revenues are still affected by the ongoing reduction of the exposure to physical sales. If we go Page 14, we wanted to illustrate how the investment by the group works to fuel our future profitable growth. Our investments are twofold. The first investment we make are on local teams, mostly sales and marketing. That investment is very significant. As you can see, as illustrated, it represents more than 5% of revenue both for H1 '22 and financial year '21. The way it works is that because the digital markets are growing in each country, we operate in, we constantly assess new opportunities such as new jobs to address new tiering of artists and labels new services. And we make this investment in a controlled way because first, we invest in very small teams of a few individuals, usually less than 5. And we have, as Denis mentioned, a very clear blueprint both in terms of operational and financial KPIs, we translate into a team must reach breakeven between 18 to 24 months, and then it will take another 12 months to reach the target profitability. And so that's the way we invest very consistently quarter after quarter, year after year, measuring each time whether we get to our level of profitability and capturing new market opportunities as the digital market and large. The second type of investment in the Central Platform. The Central Platform is mostly fixed cost and regroup the teams that are in charge of structuring the business and developing new solutions. We keep investing because those solutions are a key USP for us and they explain a lot of our commercial performance in the countries and in the digital world. And as we said, the Central Platform is decreasing as a percentage of sales. And the target is that they reach the Central Platform reached the historical level as a percentage of revenue. Going to Page 15. The results of this, of what we explained in the previous slide, demonstrate that the group profitability has a very clear path. The group profitability is, first, the segment profitability, the adjusted EBITDA presenter platform cost, that profitability is stable because we reinvest all the extra margin into new teams to capture profitable market opportunities. Then the group EBITDA margin, its increase comes from the leverage provided by the scale effect on the Central Platform investments. We manage the Central Platform investments on a cash basis, adding the EBITDA plus CapEx. And as you saw in the previous page, we decreased significantly the investment of the revenue coming from 14.6% last year to 12.4% at the end of the semester. Going to Page 16 on the free cash flow. So we have a positive free cash flow during H1. That comes from improved profitability and better amortization of the Central Platform that comes also from the superior growth in digital music sales that leads to higher creators. And that comes also from increased advances to artist labels but at a lower rate than H1 last year. You may remember that H1 '21 was marked by longer-than-expected contracts with some labels. And so we had a very strong historic. And the H1 '22 advances are more aligned with H2 '22 as a percentage of revenue. We confirm that we haven't changed our financial policies towards the artist and label deals. If we go to Page 18 on the guidance, because we have very strong reserves. We are revising our guidance upwards. So we now plan for an organic growth for the group at circa 29% in financial year '22. Our private guidance was at 20%. So that guidance is based on 2 main assumptions. The first one is the resilience of the pet streaming, as mentioned by Denis and on the fact that the upstreaming revenue has a slowdown. So the slowdown happened in June for the full month. But the growth in -- for upstream in June is the same in July. So we took that assumption that, that growth was now stable and to beat our revenue expectations. We took also the assumption that Russia and Ukraine will be stable following the strong lubes. And the organic growth for the group, excluding Russia and Ukraine is now set at plus 31% for the whole year. The second element in our guidance is that we want to continue to invest in a central way as we've been demonstrating quarter after quarter that we can do in a very profitable way. We planned for a stable EBITDA margin at 4%, so same guidance as to what we gave at the beginning of the year. And we plan also for positive free cash flow generation for the full year '22 after turning positive in H1 '22. Regarding the midterm objectives by Page 19, we confirm them as we've been operating very successful year since the IPO. So we confirm all our midterm objectives, both in terms of growth, EBITDA margin and also our long-term adjusted EBITDA margin of 15% for the whole group. Now we'll let Denis for the conclusion.

Thank you very much. Well, as a quick on I think, just as you know -- our key objective is to build basically the best digital music company for artists and labels the digital world. We -- every day that passes, the world is becoming more digital and that is strengthening our conviction that artists are not but in the same way in the digital world as they were in the traditional world and that we're very well positioned to offer them more adaptive, better solutions than the help in develop. So that is our goal. As Xavier was illustrating the way we're going to translate into investment in H2 2022 and going forward is continuing to do what we've been doing, which is identify the market segments that are becoming digital as our targetable market and margins and then taking a very disciplined financial approach to investing in these market segments, establishing leadership in these segments, signing artists, taking them to the top, developing and taking share segment after segment, country after country. That remains the core of our strategy and continuing to invest in our technology and Central Platform to be able to be smarter at leveraging data to develop artists to be smarter and more efficient at marketing media for artists in the digital world. Ultimately, that is where the key to successes and that is leading us to really continue basically building the best digital music strategy, where a strategy that is a profitable growth strategy continuing to invest in sales and marketing to continuing to invest in the Central Platform while, at the same time, progressively increasing levels of profitability as we've done in the past. So expect in H2 2022, the same thing that we've been doing in H2 2021 and accelerated in H1 2022 as the core of our strategy going forward. And I think we will now open to questions.

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

Three short questions. First, to come back on your working capital requirement dynamics. I thought it had to be structurally negative. So how should we consider it looking forward to your positive contribution in H1? Second question is, I'm interested in an update on picked-up monetization. And third, it feels like you keep gaining market shares across regions. So I wonder if you are facing any increase in churn on the premium side of the business. Do you feel that growth may be more expensive in the future on the back of more intense competition or is it quite the opposite?

I'm not sure I understood the second question. Do you want to take the...

I'm taking the first one and then…

Yes, then you'll have to refresh the second one for me because I didn't understand it.

Okay. The second question, Nicolas, was about pickup monetization, what about...

Yes. Just about your relationship with TikTok and the kind of business you expect from a type of things.

Okay. Do you want to take the first one, and then I'll take the 2 other ones?

Okay. So working cap what we are --basically, as you know, the working cap is made up of the 2 main drivers. The first driver is the creator start, and that's directly linked with the growth of digital music sales. And that's, of course, a positive element in the in the mix. And so the faster we grow in digital music sales, the more cash we receive through the return during the year. Then afterwards, there is the advanced part and the S part is, I would say, much more dependent on basically the level of advance that you are going to pay depending on the duration of the contracts and the size of the contract. So I would say H1 '22 has been on the low side in terms of advances versus revenue, but because also our revenue has increased very significantly. And you saw that last year, we had quite a big difference between H1 and H2 in terms of movement of advances. So I would say moving forward, I don't have a very detailed target on this. What I can just say is that we get some high-level objectives in percentage of advance versus growth of revenue. And this is the guidance that we give to be able to have a better view on the working capital.

Thanks, Xavier. On the question of TikTok, we essentially put TikTok in the categories of companies that are essentially social media for which the core usage is really about using music to enrich their user experience. So in the same category as Facebook, Meta or Instagram, what we expect there and the signals that we're hearing from these companies is as they are getting out of their early beta phase, which was the case for Meta, they see the value of music because they see that every user experience that is being enriched by music creates stronger user engagement on their platform and that as those usage develop, they want to expand them and for us, that essentially translate into follow-up deals, following the beta phase that are better monetized. So we expect from TikTok, from Meta deals that were in discussions to increase monetization going forward as usage expand and as monetization expands. With regards to market share gains, it's very simple. The market share gain is a result of 2 things. It's the result of the ability to grow and retain your existing portfolio of artists and labels. And as the market is being more digital and as we are doing a better and better job at developing artists and labels to the next stage, your rate of retention actually increases. It increases because when you contribute very significantly to develop artists or labels. They tend to be very happy with the services and they tend to stick. So the answer is no, we're not seeing stronger churn on our existing portfolio of clients. And it is the factor of gaining share through signing new artist and labels and growing them to the top. And basically, what we've seen is as market segments become more digital, not only are we able to sign new artists that we are developing to the top, but we are also able to sign artist from traditional labels that are now interesting in switching partner and becoming more digital. So I would say the market share, again, dynamics that we've seen which are really by -- quite frankly, there's not been any single year in time in the past 15 years, where Believe has not gained market share, whether it's 0.25%, 0.5%, 1% per year. Every single year since the creation of the company, we have gained market share as -- because of the power of the model because they being able to sort of DIY mid-level top, we expect those market strengths to continue and to continue to play very well, especially -- And really the way to think about it is our addressable market is increasing every day, and that's creating also new opportunities for us every day. I hope that answers your questions.

The next question is from [ James State ] with Goldman Sachs.

Three for me, please. Firstly, you clearly can based on growth in H1 and have raised our full year guidance quite significantly. But the EBITDA margin guidance or stay exciting increased investment impact on short-term profitability. And so I was just thinking given this, when should we expect to see a meaningful ramp-up in margin? Will it be in 2023? Or do you expect it to be later? Secondly, on the organic growth guidance, could you give some more color on the composition of this growth? Are you expecting a greater weighting towards premium or automated revenues? And finally, you've been very vocal about DSP price increases from the start of the year. And we're now in August and have yet to see any meaningful price increases by DSPs. What are your expectations for the rest of the year and going forward into 2023? Would be great to hear your thoughts on that.

Thank you for your question. So EBITDA margin or -- as you know, we are managing our EBITDA margin with the level of investment that we are making. Our guidance is that by 2025, we will be between 5% and 7%. And so we -- the way the model is structured is that the improvement in EBITDA margin comes from the better amortization of the Central Platform. And this is what's going to drive the EBITDA margin. And so the path to increase EBITDA with the amortization of the Central Platform. We don't expect to have a significant increase in the segment's EBITDA margin because we want to reinvest into new sales and marketing teams as long as we can demonstrate that we are gaining profitable market share. The organic guidance, the organic guidance premium and automated. We think that the growth is going to be -- sorry, the breakdown is going to be more or less what it has been so far, i.e., the premium and automated are going to grow roughly at the same that. It is true that the premium segment is more sensitive to ad supported because of the geographical profit and more importantly, because of the business model. So the premium is going to have a slower growth in H2 than automated probably given the assumptions that we took. And to finish on the DSP pricing, we've seen a number of tests actually and a number of price increase or price increases. We still expect price increases coming from a number of DSPs. So the message that we got from them at the beginning of the year is not changing from that standpoint.

The next question is from Eric Ravary with CIC.

Two questions from my side. First one is on the advertising funded slowdown. Could you quantify this slowdown. So what is the growth that you observed in June and July compared with at the beginning of the year? And the second question is on your M&A strategy. So you have made some acquisitions at the end of 2021. And since that time, you haven't announcing new acquisitions. Is it a lack of opportunities? Or do you consider that you should expect or wait for better valuations in the future?

So on the streaming on the streaming for the moment, what we have is the report monthly and the few DSP, so I don't have the full picture. But yes, what I can tell you is that it is still growing double digits, but not as fast as it was before, given the fact that we are -- of course, we are gaining market share. So it's also a significant part of the growth that we have. So it's double digit -- the stabilization of the growth that we see in June and July is double digit. I just want to add that, of course, this is their economic uncertainties. As you know, I think the number of DSPs has been vocal on this. Some of them have been more supportive than others because of their business models and because the opportunity for growth. And so that -- we took that also into consideration into -- when we did our guidance for H2.

Thanks, Xavier. And on the M&A side, we see as many targets as before, and we evaluate as many targets as before. The -- our thinking there is very simple, what we've seen, as you know, M&A is bolt-on. We've always considered M&A as a bolt-on to organic strategy. What we've seen on artist services is that we've actually been very successful at building in prints across territories organically. And that is naturally driving us to ask the questions ourselves about where does it make sense for us to accelerate versus where does it make sense for us to accelerate through M&A versus where does it make sense for us to invest more organically because we know how to do it and we know how to do it successfully and invest organically. The second area is exactly what you mentioned, which is we have a number of discussions and opportunities where given the economic outlook and some of the uncertainty in the economic outlook being a profitable company, we have time, and we're looking at what is the right moment to make some of these acquisitions rather than will we make them then what's the right moment. And right now, we are pausing some of the conversations more than accelerating them at that stage to be very pragmatic. But I would say, some opportunity -- essentially what we think is that we might have a number of targets at more attractive prices, 3, 4, 5, 6 months non-trad a year then the road than today. But we're not seeing any slowdown in the number of what we think are interesting targets.

The next question is from Richard Eary with UBS.