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

Good evening. This is the conference operator. Welcome, and thank you for joining the Believe Full Year 2022 Earnings Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Ms. -- Mr. Denis Ladegaillerie, CEO and Founder of Believe. Please go ahead, sir.

Thank you very much. We are -- welcome to this full year 2022 earnings call. We, Xavier and I, are delighted to have you with us, and we will be going through full year 2022 as well as 2023 perspective and numbers. If we move to Slide 4, please. Every day building -- Believe is successfully building the best music company for digital artists. I actually like the sentence because I do think it does reflect a fundamental dimension, which is every day, the music market is becoming more digital, and this is making Believe stronger than clarifying what is making us unique. From that standpoint, 2022 has brought a lot of clarity on our differentiated positioning, what do we stand for as a company, artist and labels at all stages of their career from DIY to established to top artists, labels from new developing labels all the way to top labels in the market. It has also further illustrated our competitive advantage, achieved through digital innovation as a digital-native company supporting digital artists. And it has also illustrated our scaling model, empowered by product and technology. And our ability to control our growth paths and profitability. All of these elements have become more and more apparent, contributing to our artist attractivity to artist and labels in 2022. And we do think differentiation, competitive advantage, scaling are going to become more and more apparent to everyone in the market in 2023. Moving on to Page 5. These elements have been the contributors beyond our strong market share gains, coupled with operational control in 2022 that have allowed us to deliver great performance and that are putting us on track to deliver, in 2023, midterm financial objectives, 2 years ahead of our IPO plan. Why? Because we have driven very strong growth. That growth has been driven by differentiated positioning. Why are we growing faster than the market? We're growing faster than the market because we are operating across the entire market, DIY, mid-level, top. And necessarily, when you operate on all segments of the market, you grow faster than competitors, who are only operating on 1 or 2 segments of the market. Two, digital innovation. Once again in 2022 and in 2023 have been and will be key drivers of growth. Our digital revenues in 2022 grew twice as fast as the digital music market. Why is that? Because stronger attractivity to new artist and labels, great ability to develop artist and labels faster than the market. And financial performance, increase our profitability in 2022, driven by illustrating again the high level of control that the management has on the growth and profitability path. We control investment -- profitable investments at segment level in each of our businesses. We control central platform investments as well allowing us to be in full control of our profitability and growth strategy. In -- moving on to the next slide. The drivers of the growth, illustrated on this slide, you see the 2 growth drivers. Once again, we've gone from 1 million artist to over 1.3 million artist in our portfolio, driven by growth across all segments. We have been attracting new artists at TuneCore as well as in the mid-level as well as we're now working more -- with more established and top artist than ever before in the history of Believe. So the market growth is being driven by growth not only on one segment, but across -- generally across all segments. The growth in digital music sales is an illustration of 2 things. It's an illustration of our ability to continue attracting and gaining market share by attracting new artists, but also of our ability through innovation, like the tooling that we developed to exploit tools, such as Spotify Discovery or best monetized YouTube to drive increased revenues for our artists and labels. This is very well illustrated in the next slide, Slide 7, where what you can see is on the left hand of the slides in -- in 2022, the labels -- this is the existing -- our existing portfolio of labels, grew 23% faster than the market. This means that through our tools for innovation, we were able to propel their growth at a faster pace and at a faster rate. And this is also a testament that as every day, the market is becoming more digital, what that means is every day, there are market segments across the world in various geographies where Believe was not operating before and where Believe is now starting to operate because artists in those segments are now generating a majority of revenues that are digital. The illustrating with a couple of countries and geographies on the next slide, straight through France, Germany and India in 3 geographies in the coming slide. France, Believe last year was the second largest music company the -- on digital local repertoire. France is the fifth largest music market. This was the illustration of our ability to develop artist at the top. We sign new artists, Nej, one of the artist here, is a good example. We sign new artists when they are at early stage with our know-how expertise. We take them to the top, develop them to the top. Interesting element here is -- on this slide as well is, Believe was the second largest player in the market when it came to catalog, with second position on the Top 200 catalog streaming album charts. What does that mean? Does that mean that we've become a catalog company? Yes, to some extent. It illustrates the fact that the largest part of consumption at the [ start ] is coming from new artists, new catalogs and the fact that Believe is signing long-term deals and striking long-term relationship with those artists, fully benefiting from their ramp-up in revenue through their growth cycle, their career development. The ability to retain top artists. Once again, we've resigned our top artist in the existing portfolio. And lastly, it also illustrates our ability to select the right partners and support their growth with Mentissa [indiscernible], for example, nominated as best female breakthrough artist, which are coming from [indiscernible], the labels that we invested in a few years ago and illustrating that capability. Moving on to another market with very similar dynamic now, the fourth largest music market in Germany. Believe was the third largest music company on digital local repertoire. There are a couple of things that illustrate the ability when we're selling earlier in the power of a multi-tier model, illustrated here with also the power of upsell with Theo Junior from TuneCore that went from being a TuneCore artist all the way to becoming a top 10 official German chart artist. Supporting artists to reach new heights. We spoke in one of the earlier calls about Milky Chance, which was previously signed to a traditional record label, which we took to new heights after signing both on their new releases, 1.2 billion global stream as well as on their catalog, which was transferred as part of the deal. And also the ability to, like in France, continuing to grow artists through the Lifted program, which is one of our programs for developing artists. Moving on to Slide 10, a larger illustration at a regional level, where, as you know, when you project Asia with the strongest belief that Asia will become the largest music market, this is mostly a local market with -- in China, in Japan, across in India, markets that are dominated by local artists. Believe is positioned on these markets as a leading local player. Our target goal in these markets is to become the largest player locally because these are markets that are purely digital markets. We've made great progress in 2022 through investments in continuing to do local investments, organic in sales, marketing and support team, and we've taken more artists, more and more artists to the top. You have a few examples on the slide from Young Captain in China to others in some of our geographies as well as identified a number of pipelines for investments across the territories as we are deploying all of our investment in these geographies. So in a nutshell, very strong market growth across all of the geographies across all of the tiers. Just 3 examples that are basically confirming our ability to become a top market player in all these markets, and that is a core element of our continued growth strategy. That growth strategy, moving on to Slide 11, is continuously driven by the investments that we're making in our central platform to drive innovation. A few examples in 2022 that will go further into 2023. The launch of the new pricing at TuneCore that has been extremely successful and translated into an acceleration of growth. Also followed by the launch of a new redesign, new functionalities, split functionality, which allows artists to split royalties. There will be new functionalities coming in the coming months that led Fast Company to nominate TuneCore as part of -- as one of the top 10 most innovative companies -- music companies and testimonials on YouTube and Spotify. On Spotify Discovery, where Believe has been the most engaged and leading player and driven great results for the benefit of our artists and labels, and YouTube, where we have historically overindexed significantly on our ability to monetize and grow the revenues of our labels, or on the right-hand side of the slide, the launch of Encore, which is Believe's mobile application for artists and labels. Moving to Slide 12. The -- as you know, we've had the occasion to touch on this on prior calls. We did -- we felt that market conditions in 2022 were not quite right to do full-blown M&A. And nonetheless, at the end of -- in Q4 2022 and most recent months, we have started reengaging on a number of strategic partnerships. You have 3 illustrations there with 3 agreements signed with top local talent management companies in Germany, in France and in India about developing local artists in all of these 3 territories in some of the largest market segments. This is really about once again telling about the attractivity. These are teams that were previously working either with traditional labels that have demonstrated a great track record of success that were looking for a partner for the next phase of their development in the digital world. We estimate that we have a number of these opportunities coming to us in 2023 as well as the changes in the market are now offering quite interesting opportunities to resume our -- much active acquisition strategy in '23. Moving on to Slide 13. At the same time, as we've been working on building the business, we have continued on our commitment to shape music for good through CSR commitments. We have a couple of milestones there on the sharing of value with artists and our labels. We were super happy to have paid out over EUR 1.1 billion in digital music sales in 2022 as well as sharing value with all of our employees and executives through the launch of new LTI plans as well as the launch of our first employee shareholding plan and additional value sharing. We have once again confirmed and continued to commit to our efforts on diversity and gender quality, with now 50% of our Board and of our Executive Committee with women as well as 43% of our total headcount being women. So this is -- all of these elements have contributed to a great financial performance that I will now let Xavier run through.

Thank you, Denis. Can we move to Slide 15, please? So as presented by Denis, we have another solid operational and financial performance, with market share gains in all key countries and all key DSPs. We reached, for the first time, the EUR 1.1 billion mark in digital music sales. That reflects the penetration of our model, specifically in the Premium Solutions. The organic growth is 32.2%. So -- and we are growing in all regions. We are growing in every quarter despite the weaker Q4 that we are going to discuss a bit later. The growth is driven by digital revenue with 33.8% growth in 2022. The digital revenue represents 92% of our total revenue, slightly increasing versus last year. The 8% non-digital sales include notably physical, that we are curbing specifically in Germany, merchandising and live. We reached 4.6% EBITDA margin versus 4% in last financial year '21, driven by a better amortization of the central platform investments. We are also back to positive free cash flow territory with EUR 52 million, driven by EBITDA increase and also a positive working capital variance, enhanced by one-off EUR 20 million yearly payment from one of our digital partner renewed during the year. Now let's have a look now to our quarterly trajectory. So the quarterly -- so that's Page 16. The quarterly trajectory in terms of organic growth showed a deceleration of growth in Q4 '22. Q4 grew 22.6%. This deceleration is driven by digital sales, specifically in ad-supported revenue. After a first slowdown in June '22, there has been another steep deceleration in Q4 from November onwards. In the last 2 months of the year, ad-supported revenue barely grew single digit. Our market share continued to grow as in previous months, but the various store monetization performance has been impacted, essentially due to economic conditions. Subscriptions by our additional partners continue to be strong, but could not compensate the slower ad-supported revenue that affected all regions, but more predominantly in the countries where digital penetration is the weaker. Let's go now on next page to the growth by segment. So we have strong growth in all segments, Premium and Automated, which is a tribute to the appeal of our model based on digital innovation and differentiated positioning. Automated Solutions, targeting music creators, has an organic growth at constant exchange rate of 27% versus last year, with a strong innovative year, as mentioned by Denis. We launched the unlimited pricing offer. We localized the service in Southeast Asia, and there are new exciting opportunities coming in for 2023. Automated Solutions growth in Q4 has seen slow -- has been slower, with 70% as TuneCore social platforms revenue share offering is also impacted by ad-supported slower growth and because also the unlimited new pricing has lower [ appeal ] that is not yet compensated by the strong ramp-up of new clients. Premium Solutions, targeting labels and emerging to top artists, show an organic growth of 32.5% versus last year. And the organic growth has been slightly above total Premium Solutions growth at 32.5% with strong market share gains. The organic growth rate is above total growth rate as we have a negative currency impact in total revenue, mostly related to the depreciation of the Turkish lira. And we are against a positive perimeter effect from the acquisition made in Q4 '21 and a slightly positive [indiscernible] inflation effect that is also related to the Turkish lira. Just also to be precise as other actors in the music industry mentioned a positive currency impact in the 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 impacts. But in Q4, given our geographical footprint, this impact has been much, much weaker. Let's go to the next page where we are going to focus on the geographies. We gained market shares in all key geographies. The geographical footprint and growth partner of the group, as illustrated by Denis, is a good illustration story of our model. So we are focusing on digital music. We are well positioned in the countries where digital penetration is lower, and then this, the future growth is higher. This is illustrated by the strong growth in APAC and Africa, and I refer to Denis presentation of Southeast Asia, for example, that growth in that region was 52.7%. In all countries, including major developed ones, our adjustable markets are enlarging as more and more traditional genres of music become digital, leading to more opportunities. This is demonstrated in growth in France with 34% growth and [ more generally ] in Europe, excluding France and Germany that grew 27.6%. Even in Germany where, as you know, we are reducing voluntarily our exposure to physical heavy contracts, we are getting significant market share in the digital market, becoming one of the leading player in the local artists market, as Denis illustrated. Finally, thanks to our multi-tiered approach. We serve all digital artists from the music creators in Automated Solutions to the top artists in Premium Solutions. And we do that in a profitable way. And that is also shown in the Americas growth region, where you know Automated is particularly significant. That region grew by 30.7%. Let's now see how we are managing to create growth, which -- by our very selective investments. So that slide -- next slide. So as you know, we have a digital focus. That digital focus is based on a mix of technology, solutions and music that is allowing for differentiated positioning, digital innovation, which translates into higher appeal to artists and labels and steady operating leverage. We are constantly deploying new teams to address new music genres or new business lines or new types of artists and labels. We have a very strong operational control as our blueprint is very well-defined. Each team is made up of 4 to 5 individuals. Each team takes circa 2 years to reach breakeven, which means that our segment EBITDA margin is very stable over time. This is a growth investment EBITDA margin. That margin, as illustrated in the slide, include circa 5% of the revenue in investment, and that 5% is very stable over time because we deploy new teams only when the existing ones have reached profitability and are at full capacity with a very high certainty in terms of profits. That investment in new teams is what drives future growth and will continue as long as each team can demonstrate that they are growing revenue and operate profitably. The second investment area for Believe to fuel growth is the Central Platform. This is really a key driver for the differentiation and innovation. Central Platform provides the technology and the solutions, not only the tools, but the process, the structure and the management that power the business lines in the countries. The Central Platform teams are split between the tech and product teams that design, develop and operate the tech tools. The G&A teams, the finance, legal, HR, for example, that provide the framework to manage our businesses and resources. The sales team that designed the commercial offers and organizations and provide the management tools that are then consistently leveraged at local level. The Central Platform costs are not driven by volume, but they are more a function of the number of products we deployed, the number of businesses lines we are managing, the number of countries we operate in or even the number of businesses we acquire. As the group expanded massively in 2019 into 2020 finalizing its multitiered approach with the launch of artist service in 15 countries or the split of artist solutions from label solutions, this Central Platform increased significantly as a percentage of revenue in those years. The Central platform is still expanding in euro terms as we want to continue investing in new solutions and continue to be at the forefront of innovation. However, the Central Platform is decreasing as a percentage of revenue. We were at 17% of revenue in 2020, 14% in 2021, and we are at 11.7% in financial year '22, and the Central Platform will still be decreasing as a percentage of revenue in financial year '23. So this is what drives the EBITDA margin improvement in the next slide. The group EBITDA margin trajectory is a function of stable segment EBITDA margin, the margin pre-Central Platform cost. That margin, as we saw before, included 5% -- 5% of revenue and reinvestment for future growth. So the margin, excluding reinvestment, is around 19% or 20% mark. The Central Platform cost, as a percentage of revenue, is decreasing and will be the one that -- and is the one, sorry, that has been driving and will be driving the next years, the group EBITDA profitability improvement. Because we are above our IPO expectations in terms of revenue, we have been able to drive operating leverage, which explains why we are in a good position to reach the lower bracket of 2025 EBITDA target almost 2 years ahead of our plan. Let's go to slide -- next slide. So we are -- as I said before, we are back to positive free cash flow generation on the back of the EBITDA increase, the Central Platform CapEx allocation and a positive working capital environment. So the positive working capital is driven by increased artist and label advances, but that are not impacted by the unusual longer-term contracts that we signed in financial year '21. The commercial strategy of the group in terms of advances has not changed. The advances are there to fuel future growth and the financial KPIs are still the same. The -- also -- we had also a one-off payment of EUR 20 million from a digital partner that used to pay quarterly in advance, but now pay yearly in advance, the renewal in Q3 of 2022. Let's go to the next slide of the Slide 24. So what is our outlook for the year? So we are now expecting an organic revenue growth of around 18%. That is based on a very resilient paid streaming and also the stabilization of ad-funded growth as it has been since the month of November '22, i.e., a low single-digit growth for the full year. We are anticipating a higher EBITDA margin of around 5% as Central Platform costs will be decreasing as a percentage of revenue. As we are demonstrating quarter-after-quarter, our powerful model is to drive growth to gain market share and to increase profitability. We will maintain our focus on investments in local sales team and Central Platform tech solutions, while managing actively on investment cycles to further improve profitability. The group operating leverage will continue to come mostly from the Central Platform costs as it has been since the '20. We expect a positive free cash flow generation in financial year '23 along with an uplift of circa EUR 20 million, same thing in '23, same as '22 based on an annual installment of a digital partner. Next slide. We are confirming our midterm objectives, and we are well on track to deliver them. As a reminder, we forecast an organic revenue growth of 22% to 25% for the period 2021 to 2025. Even if with a lower guidance for 2023 due to economic conditions, our average would be, since 2021, circa 25% organic CAGR. We also 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 in next year -- sorry, in 2023. The long-term EBITDA margin for the group of 15% after hyper growth phase is also unchanged. Now I'll let Denis conclude the presentation.

Thanks very much, Xavier. I'll try to be quick to leave us enough time for everyone for questions. So how do we think about 2023 versus 2022? It is very, very simple. In 2022 to drive performance and growth, we used 2 levers. We used the lever of our differentiated multi-tier model that allows us -- that allowed us to grow in all segments and in all geographies. That lever is going to continue to play fully in 2023. We used the lever of innovation to drive increased market share on the services. Same thing. We do think that in 2023, the opportunities to differentiate further and drive innovation are going to be even higher than in '22. And then there are 2 additional levers that we do think are going to come in play in 2023. The first one is acquisitions. The ability to market conditions are making it much more attractive for us now to resume some conversation than in 2022, that's one, which we didn't leverage in 2022. And the second one is the topic in the markets around value sharing. What as -- as I'm sure many of you have heard, there's a number of discussions around value sharing in the market. What is our perspective on this? Like, we welcome that debate. Very interestingly, I was going through my e-mail a couple of days ago. First e-mail I sent on the topic to the CEO of Deezer was in November -- November 30, 2011, more than 10 years ago. So that's a topic that we welcome. What do we -- why do we think that topic is going to play very positively for Believe for 3 reasons? What is it that needs to get solved in terms of value sharing in the market? The first thing is that we need to reestablish the basis of a fair market. The fair market is what is one that is rid of, cleaned up of fake streaming, abusive streaming, et cetera. What's our perspective based on the data that we have around this is that Believe, these are practices that are span major record labels, independent labels relatively with a few exceptions at the same level. Believe has taken a number of measures to index below on all of these elements, so that the cleanup of the market should translate into increased market share for us in the midterm. The second element -- and when I say Believe, it's really Believe Group, Believe TuneCore. The second element is we wanted that needs to be achieved for a fair market is a balanced market. In 50% of the markets in the world, local artist dominates the market. They represent about 2/3 of the streams. That is the case in the United States, that's the case in Japan, in China, in India. In the other half of the world, local artists on average represent about 1/3 of streams. We do think this is a major imbalance. This is the first and largest imbalance that has to be corrected in value sharing. And because Believe is positioned first as an actor position to support local artists and local labels, we do think that we will be gaining in furthering that objectives, for which we're finding very strong support at our global digital music partners. The third element in the market is really about increasing diversity, making sure that value can be allocated across different genres of music and different musical genre. On this, we do believe that when we model our view is that the diversity of our catalog across labels, across artists, in various genres of music, especially through our label and artist services business, plays perfectly to that objective. So the debate that's been initiated, I think, is one great debate that we think will set the basis for the creation of a fair, more balanced and more diverse market. And -- this is one topic where we're looking forward to move all of these conversations as we've had with many of our partners for many years now in making them come -- become a reality in 2023. And we do think that they will end up significantly benefiting Believe in the long term as well as near-term market. So in short, we do think that the opportunity is available for us beyond our base case scenario are very significant for 2023, and we look forward to another year of strong growth. Thank you very much. And now I think opening the floor for questions.

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

On M&A, you said that market conditions may offer some opportunities. But alternatively potential sellers may wait, if they can, for better days. So why do you think it would be more easy now? And what kind of assets you are more interested in? I will have a follow-up questions after.

So the -- for some sellers, there's only so long you can wait. So -- and I think a lot of the -- what we see in the market dynamics is a lot of the sellers, what are they looking for? The same thing as before, which is a partner that helps them accelerate growth. When you go to them with some of the numbers I was sharing with, our ability to go twice as rapidly as the speed of the market to increase revenues for existing labels by 23% above the market growth. Obviously, these are very attractive elements for us. So that is facilitating a number of conversations. And once again, we do expect that, that competitive advantage, driven through innovation, are going to be even stronger in '23, '24, '25 and a lot of people are starting to realize this. Once again, it's like every day, the world is becoming more digital, and people are realizing this. And they're realizing that we are a digital-first company and that's making more -- us more attractive. And I think that market maturity is accelerating some of the conversations. Type of assets we're looking for? Same as before. Great companies with great management teams aligned to strategies with capabilities in market or in terms of music that we want to strengthen and where we do think that we have the ability to grow. So we will exercise exactly the same discipline as we -- as we did before. We're also looking at the opportunity of potentially building new capabilities that we think are interesting and play as a [indiscernible].

I just want to include that, the pause we made in '22 was not for a lack of targets. We decided to pause the conversations and to say before we get -- we need to have more visibility before engaging. So it was not a question of number of target, it was more us deciding that.

Okay. Got it. And just a quick follow-up. Did you -- just to make sure I understood it correctly, the EUR 20 million installment revenue factored in the 2022 numbers. So is that correct to say that it's going to be another EUR 20 million gain in 2023?

Yes. Yes, because basically, the partner used to pay quarterly in advance, and the negotiation came to a year in advance, and that's a 2-year contract. So first yearly payment was 2022 and the second yearly payment is going to be '23, same amount, yes.

And it will be Q3 as well, I suspect?

Probably, yes.

The next question is from James Tate with Goldman Sachs.

It's James Tate from Goldman Sachs. I have 2 questions, please. Firstly -- firstly, in your last results call in November, you mentioned that you're currently in renegotiations with TikTok. Could you give us a quick update on where you are with them? Do you still expect the deal to be agreed soon? And are we talking sort of H1 or H2? And then secondly, just going back to what you talked about on advertising trends. You mentioned you saw a further drop in November, where growth was in low single digits. Have you seen this continue in Q1? And what does your full year guidance assume in ad-funded streaming trends? Are you expecting to see an improvement? And if so, when?

James, I'll pick up the first one, and then Xavier will pick up the second one. On -- so on TikTok, we are more advanced in our discussions than where we were last year is what I can tell you as we feel pretty good about how things are moving forward. So yes, we expect these negotiations to land in the near future. Xavier, do you want to add?

On the second question, the -- our guidance is based on the assumption that the low single-digit performance we see in ad-supported monetization is going to -- that we've seen that since November is going to continue. It is continuing today as when we speak. And so the assumptions for is that it's going to continue for the full year. There are -- as you know, there are a lot of uncertainties there. So we thought it was prudent to take this assumptions for the full year.