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

Good evening. This is the conference operator. Welcome, and thank you for joining the Believe Third Quarter 2022 Revenue Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Denis Ladegaillerie, Founder and CEO of Believe. Please go ahead, sir.

Thank you very much, and hello, everyone. Welcome to this quarterly call. I will be presenting today with Xavier Dumont, Believe Chief Financial and Strategy Officer. If we can move to Slide 4. So Q3 was the fifth consecutive quarter of strong growth, improved profitability and free cash flow for Believe as a public company. I could almost add, this was the 62nd quarter of consecutive double-digit growth since the creation of the company. Revenue was up for the quarter 37.6%, leading us to revise guidance on growth, profitability and free cash flow. If you want to move to Slide 5. In the past quarter, Believe grew structurally faster than the market. Why do I use the term structurally? One, because our digital expertise in the past quarter has allowed us to constantly grow our portfolio of local artists and labels at all stages faster than the market. I'll touch on this soon. That means that we are identifying the right artists and labels, but we are also deploying a high level of service to grow them faster than the market. 2, because our artists and label acquisition engine, which is relying on our business model, designed to offer products and services to artists and labels at all stages of their career, is running full steam and is strongly attractive to artists and labels with solutions that are best adapted to them, whether they are a DIY artist, a mid-level artist or a top level artist. And we have attracted artists in each segment this quarter than ever before. 3, because we operate in a very large number of countries and in a great diversity of genres of music and market segments, web market digitalization and transformation that is constantly creating new opportunities -- new market opportunities for us. And we'll touch that as well. Finally, in Q3 2022, our strong growth is further contributing to increased profitability and cash flow, as Xavier will touch on. And we have also continued to roll out our CSR strategy, which you know is at the very core of our model. Why don't you move to Slide 6. The very strong performance from the existing portfolio, first, of artists and labels thanks to our digital expertise. We've grown our existing portfolio, that is the portfolio of artists and labels that were signed before this quarter, already existing sometimes for several years, sometimes for a few months, at a rate of 15% above market growth. So allowing all of our existing artists and labels through a combination of team expertise, technology to grow their streams and their audiences faster than the market. Secondly, we've grown faster because we have developed -- we're continuing to constantly develop top artists across all markets around the world -- you have a few examples here -- focused on some of the more major markets with artists like #1 Billboard charting artist Ultimo in Italy or Matt Sassari in the U.K. signed to CR2, one of our labels in electronic music. I'll touch on what we're doing in this area a little bit further down the road. So strong performance in developing our existing portfolio. On the next slide. That strong performance has been complemented by a continued strong growth performance in signing and developing artists, once again in all genres of music and attracting artists in a wide variety of genre music market segments and at different levels. A few examples to that, that I do think illustrate quite well how this plays out Joao Gomez. Joao Gomez is a Piseiro Brazilian artist who has now surpassed a billion streams. This is an artist that was identified very early as a promising artist by our teams in Brazil -- so it tells about our ability to identify artists early -- who is now a very top artist and someone who started creating music as a typical music creator during the pandemic 1.5 years ago and who is now a top local artist and that we have nurtured to the top. Second example about our ability to compete successfully in a very major market and at the very top of the market with T-Low. T-Low is a German hip-hop artist who was the hottest newcomer in Germany last year with the #1 single and that was signed, in competition to old traditional labels, by Groove Attack, our local hip-hop entity. Third example, Paula Koops, who is a Spanish pop artist, typical of independent artist, working independently with a structured management, not signed to artist services. She is very independent. She's signed to our artist solutions. And very typical of what we see from many artists in the markets. And 2 more. Lily Moore, U.K. pop, previously signed to a major record label. Why did she sign to us? Seeking more control over her creative process and a more digitally-minded approach to marketing and to her music. And finally, LA SAD, which is an Italian rock punk band, that is an upsell from TuneCore, previously signed to -- previously uploaded their music on TuneCore, that's been signed by our local team. So we see -- basically, the drive that you see in the growth in the third quarter really comes from that attractivity in all segments of the market all the way from entry level all the way to the top. I should add that at entry level, we're continuing to see a very strong success of social platforms for TuneCore as well as increased growth driven by the new pricing model that we deployed earlier in the year and once again allowing us to complete our pipeline of artists. Aside from the diversity of artists, if you want to move on to the next slide, we are -- we've been continuing to strengthen our capabilities in all countries and especially in Asia, which is expected to become the largest music market in the world. Just focus here on what we're doing in Southeast Asia. Very typical, where we are strengthening our entire capability from building, localizing TuneCore with local payment solutions, local offering to strengthen our artist base at very early level. Strengthening our label and artist solutions, offering in the middle and building in print -- artist services in print at the top with Byond as an example in Thailand, which in the past year has become the fastest growing and the most successful hip hop label in the country. We have Saran, an example. Saran is the top local artist in that territory. Globally, relying especially in those territories that are very digital audiences on our ability to break and develop artists at the very top, which -- finally, we complete with growing faster our strategic partnership with Viva in the territory, where we have allowed -- our expertise has allowed them to accelerate the growth of the business. Last example, if you want to move to the last slide, about the opportunities and the new capabilities that we're developing in a specific genre music in dance and electronic music. Dance and electronic music is typically a genre of music where labels used to license tracks on a territory-by-territory basis mostly to major record labels. We saw an opportunity to completely change the model in that market segment, where we have successfully demonstrated in the past year the ability to break artists on a global basis with a centralized approach. And we've developed a capability that is very relying on digital marketing and centralized global promotion on playlist on Spotify and other services to build an offering dedicated to artists and labels in that market segment. That offering has been extremely attractive and has allowed us to acquire a significant number of labels in that genre of music in the U.K. especially. And which recently, as an example, also signed Big Top Amsterdam, which is one of the major players in that genre of music. So opportunities, capacity across the board geographically as well as in market segments that we're exploiting. Last element in our strategy on the next slide, in the past quarter, is we've continued to deploy our CSR strategy. As you know, for Believe, the CSR strategy is really ingrained. It is at the core of our model. It's been thought around talent, how do we develop our artists and labels and how do we develop our own talent. 2 initiatives that we've driven in the past quarter. One, it was extremely important for us post-IPO to associate all of our employees to value creation. And we successfully launched an employee shareholding plan that was offered to a meaningful percentage of our employees on a global basis and where we reach a 40% subscription rate on that group. The second thing that we focused on, continue to focus on is creating a more gender representative and inclusive music industry. As you know, we are the only company in our space to actually have parity at both Board level as well as from Ex level, and we've continued to drive initiatives in this area with deployment of gender parity measurement internally in France and more globally. And as well as continuing our initiatives with Reeperbahn in Germany and Keychange to support the same change at the artist and in our ecosystem. So globally, in a nutshell, we've continued to do in the past quarter very successfully what we announced we would be doing at the IPO. And I'll pass on now to Xavier to illustrate with the numbers. Xavier?

Thanks, Denis. Hello, everybody. So let's review some of our financial performance for the quarter. So let's move to Slide 11. So as Denis presented, we have another solid performance in revenue this quarter with market share gains in all key countries and key DSPs. Our organic growth is at 37.6% for the quarter, very much in line with H1 performance that was at 36.6%. The growth, as usual, is driven by the digital revenue, which grew 39.6%. And as you can see on the right-hand side of the page, it's very close to the Q2 performance that was at 40.1%. The digital revenue represents 94% of our revenue in the quarter. slightly increasing versus year-to-date. As you remember, non-digital sales include notably physical, that we are curbing specifically in Germany, merchandising and life. So now let's have a look at our growth by segment moving to Page 12. So we have strong growth in all segments, premium and automated, which is a tribute to the appeal of our model. The automated solutions segment that is targeting music creators has an organic growth at constant exchange rate of 36.1% versus last year in Q3 and almost 47% at current exchange rate. As Denis said, we see strong performance of the social platforms revenue share offering that we launched last year in Q1, while the unlimited new pricing offer that we launched in June this year is ramping up. That leads to a year-to-date organic growth for automated of 30.8%. Premium solutions study targeting -- that are targeting labels and emerging to top artist show an organic growth of 37.5% in Q3 versus last year. You may have noticed that the organic growth rate is above total growth rate in the quarter, and let me just explain to you why. We have a negative currency rate impact in total revenue. That is mostly related to the depreciation of the Turkish lira. And we have, on the other side, a positive perimeter in effect from the acquisitions we made in Q4 '21 and a positive per inflation effect. Just to be clear, as other actors in the music industry like Spotify mentioned in the recent release, a positive currency impact in their revenue. It is very likely that embedded in the revenue we received from the digital partners like Spotify, Apple or YouTube. There are some positive currency impact. But given our geographical footprint, it is probably much less than what has been disclosed by other factors. On that topic, let's review what was our geographical performance for the quarter and move to Page 13. As we said before, we gained market shares in all geographies. The geographical footprint and growth partner of the group illustrate our model quite perfectly. First, we are focusing on digital music, well positioned in the countries where digital penetration is lower, and thus, future growth is going to be higher. This is illustrated by the strong growth in APAC in Africa, as illustrated by Denis minutes ago on Southeast Asia and the growth in that region is -- was 61.1% in Q3. Second, in all countries, including developed ones, our addressable markets are enlarging and more and more traditional genres of music become digital, leading to more opportunities. This is demonstrated by the growth in France with 41.2% in the quarter and more generally, the growth in Europe, excluding France and Germany at 29.8%. Even in Germany, when we are reducing voluntarily our exposure to physical heavy contracts, we are gaining significant market share in the digital market during the quarter. Third, we serve all digital artists from music creators to data partist in a profitable way, as shown in the Americas region, which show a growth of 35.1% during the quarter. So in conclusion, as Denis mentioned, our digital focus that is based on a mix of technology solutions and music, allow for better quality of service, higher P2 artist and labels and steady operating leverage. With these solid results, let's have a look of our revised guidance for our outlook for financial year '22 and move to Page 15 directly. So on the back of the high organic growth, we are now expecting an organic revenue growth in excess of 30%, reflecting resilient pet streaming and stabilization of extended growth as it has been the case since the month of June 22. We are anticipating a higher EBITDA margin of around 4.5% as organic growth is strong and central platform costs will be decreasing as a percentage of revenue. As we are demonstrating quarter-after-quarter, how powerful our model is to drive growth, gain market share and increase profitability. We will maintain our focus on investments in local sales teams and unessential platform tech and solutions while managing actively of investment cycle to further improve profitability. The group operating leverage will continue to come mostly from the central platform cost as it has been the case since 2020. We expect a solid positive free cash flow generation in financial year '22 with a positive working capital for the full year, a lower CapEx in percentage of revenue versus last year and an uplift of around EUR 20 million related to a manual installment of a digital partner that we renewed in Q3 '20. Let's move to Page 16 on our midterm objectives that we are concerning because we think that we are very well on track to deliver those objectives. So we are confirming an organic revenue growth of 22% to 25% for the period '21 to '25. We confirm an adjusted EBITDA margin from 5% to 7% by 2025. The operating leverage will be based mostly on a better amortization of the central platform cost. And as you can see, we should be close to the lower bracket targets in '22, thanks to higher revenue and counsel and platform investments. We confirm our long-term EBITDA margin target for the group of 15% after hyper-growth phase and that we are considering as being unchanged versus what we previously communicated. So no at Davis to conclude the foundation. Thanks very much, Kate. If you can move to Slide 17, please. So as a conclusion of what we expect in Q4, we expect strong revenue growth to continue the engine, the growth engine that we built to be able to serve and attract artists at all stages is working better and better every day. As the market is more and more digital, we have more opportunities in more and more market segments and that is constantly enlarging our addressable market and the investments we have made both in teams and in technologies are allowing us to differentiate by offering a higher level of service, and we feel very confident in our ability to continue growing our existing and our new artists and labels at a rate faster than the market. Thanks to these teams and these technology innovations. So overall, we expect, as Xavier was saying, as a result, higher growth, higher margin as we're continuing to be better at automizing our operations and sustainable positive free cash flow for the entire year. In other words, we expect the dynamics that we have experienced so far to continue playing in Q4. Thank you very much. We -- I think we can open now for questions.

[Operator Instructions] The first question is from Tom Singlehurst of Citi.

Tom here from Citi. I really appreciate the opportunity to ask some questions. The first sort of 1.5 for about cyclicality. I mean you talked about a tougher trend in advertising. I mean not materially worse than what you've seen over the summer, but can you maybe just talk about that a bit more and expectations rolling into the fourth quarter? And then on paid for streaming, I was wondering whether you think we should be worried about the outlook there. I'm particularly interested in whether you think Apple putting up prices is a sign of strength or a sign that volume growth is slowing. So would love some perspectives on that with a view to getting a sense of how the economic environment will impact revenue? And then actually, maybe one final question for Xavier on -- you mentioned FX within the organic number. Now I think I understand it, but it would be great if you could just explain again how FX is captured in the numbers? And I presume the impact is positive, but if you could break that out a little bit, that would be very useful.

I will take the first and the third, and I will let Denis talk about the Apple pot. So cyclicality on the ad-supported monetization, what we said is that, remember that back in June, we saw a decrease in growth in that supported monetization in the month of June, and our assumptions was that during Q3, that growth would be stable, and that's what happened. And so we are assuming also that the growth in that support to monetization will be stable in Q4 as it has been in Q3 so since June.

On the outlook for paid streaming, -- at this stage, we feel very good. I think the overall -- so what we hear from the market and whether it's from Apple or Spotify or YouTube or others is that generally, all -- at this stage, all paid streaming services are telling us that they feel very good about paid subscriber growth for Q4 of this year. I do think that like us, their customer acquisition engine is getting better and better every day. And they have all exceeded their expectations, and we've not heard any single partner tell us otherwise. And so therefore, to your questions, I do think that the move from Apple is not a way of trying to compensate for the weakness on the subscriber side, certainly, what not, not what we see. And I think as Daniel was saying as well there, he feels pretty confident in 2023 in its ability to increase pricing and not increased churn. So I would say, overall, so far, on paid subscription, there is no -- we're not getting any signal from any partner at that point, that points towards a slowdown in growth, at least in the foreseeable future. And to your third question about FX. So what I said is that the FX impact on Believe numbers are negative in a sense, so that explains why the organic growth is flat at constant exchange rate is slightly above the total growth and the exchange -- the negative exchange rate impact comes from the depreciation of the Turkish lira. And so what I also mentioned is that because we saw that in the communication made by other music actors, they said that contrary to Believe they had a positive exchange rate impact that it is very likely that we have also an exchange rate impact, but it is very likely that its impact is much, much less significant than the other actors because of geographical footprint is we are less dependent, for example, on U.S. currency. And so that's why I said that our impact that, of course, we cannot measure because the FX is embedded in the invoices we received from the various DSPs is probably very limited for the.

Very clear. Congrats on the quarter.

The next question is from Nicolas Cote-Colisson with HSBC.

Maybe a follow-up on Apple Music and not generally on DSPs pricing going up because one of the justifications by Apple is that licensing cost is going up. So what does it mean for Believe in terms of a gross margin or retention of any price rise? And if I may, I have a second question around your investment in the central platform because it seems to carry a good return, so I can see why you are keen to carry on investing there. But I would suspect a large part of investment is with the labor costs and the most of the staff must be in Europe and essentially in France. So I guess my question is, how do you see the inflation whether on G&A or salaries paying out for your profitability?

So Xavier, I take the first question and you take the second one. So first question was on the prices and price impact and gross margin. Believe's second gross margin, yes. So good question. I read that sentence in around licensing costs, and I quite did not understand it. As you know, all of our deals with DSPs, whether it's Apple or others provide that we participate. We essentially receive a percentage of the revenues that they generate. So once these revenues are increased as they increase paid subscription, our revenues will be increased proportionately to the price increase. That's what our agreements with the mean DSPs provide. So no, I don't -- and to my knowledge, is the same for other players. So don't quite understand where that comment is coming from.

And on inflation, yes, you're right that most of the inflation in our model comes from the wages. That's really where inflation might be. So as you know we are also operating in a sector with very high competition around some profiles, specifically on IT and music experts. So as we have been operating for years in that very competitive environment, we do think that, yes, there is going to be some inflation, but not very, very significantly so. And so we don't expect -- we don't expect it to be -- have a significant impact on our profitability given the growth rate of revenue versus the inflation rates that we have in the various geographies we are and specifically in France.

And I would say -- and I would add on top of that, Nicolas, that we also have -- we're looking at a number of opportunities of cost reduction in some areas cost efficiencies as well.

The next question is from Christophe Cherblanc with Societe Generale.

Yes. Xavier. First one was on the growth. I understand your top client is YouTube. So that's 30% plus of revenues. When I'm looking at the YouTube numbers in Q3, they were what you must have seen. So it seems unless your YouTube related revenues have grown much more than the whole of YouTube. It seems that the non-YouTube revenue must have grown almost 50%. So is the math correct? And can you confirm there is a huge gap between the YouTube revenues and the rest? The second question was on the 30% plus, should we understand it could be mid-30s because when I'm looking at basically the very strong numbers you've put at the 9-month stage, it seems very hard for me to get much below 35%. And the third one is on the EUR 20 million cash inflow that Xavier was mentioning. Does it mean that it's a EUR 20 million inflow that was not recognized or was not cashed in last year? Is it a one-off? Or is it something which is happening with one partner only every few years. So can you clarify the 20 million number, please?

So on your question on YouTube, which is ad supported. So the YouTube, it's both ad supported the subscription business. So you have the 2 businesses within YouTube. On the ad-supported business you are speaking, what we said is that we are -- what we said so in H1 and we confirmed during Q3 that the growth has been lower since June, but we confirmed last time, it was double-digit growth. And so we also saw that the subscription-based revenue have been growing steadily, both from the fact that the GSPs has been YouTube and Spotify has been doing a great job at transforming ad-supported subscription to a fully-fledged subscription. So that's a positive driver. And second, the fact that the subscription business for the DSP has been very resilient during the past quarter as it has been before. And you can add on that, of course, the fact that we are gaining market share, which make us growing much faster than the various sectors. Regarding the percentage of growth, I will reiterate that we said in excess of 30%. So it's -- I confirm it's in excess of 30%. And on the third part, it's -- this $20 million that we received is a change versus -- so we renewed a contract with a digital partner. That digital partner used to pay on a quarterly basis after negotiation that ended in Q3 that partner, we agreed with that partner for an annual installment. And so that's why it's a change in our working capital because we received 1 year of this kind of revenue. And so it's a 2-year contract and so we're going to have another installment next year same period.

But in 2021 last year, you had the same EUR 20 million spread over 4 quarters, right? So it's not making a debut?

No, it wasn't the same amount because as you know, we are growing. As you know, we are improving conditions and so it was not as high as that.

Okay. Can I squeeze the very last one on Russia. The impact of Russia is lesser than what we might have here at the beginning of the year. What's your visibility on 2023 is the pipeline of Russian or Ukrainian artists drying up? Could we see another small decrease next year in '23 versus 2022?

But to be -- we have a little visibility on Russia and Ukraine. The situation can evolve every day. We keep operating in the country with the same principles, which is security of our teams and no extra investment. Because Russia and Ukraine is growing at a lesser rate than the rest of the group, the weight of Russia and Ukraine in the group revenue is decreasing. No, we are at 7% versus 9% last year, and we -- it's -- we do expect that this weight is going to decrease. But we talk again when we are going to talk about 2/23 mid-March when we will have a better visibility.

The next question is from Richard Eary of UBS.