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

Good afternoon, this is the conference operator. Welcome, and thank you for joining the Believe First Quarter 2023 Revenues Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Denis Ladegaillerie, Founder and Chief Executive Officer of Believe. Please go ahead, sir.

Thank you very much, operator. And welcome, everyone, to this Q1 2023 investor call. You can move on to Slide 3. Xavier and I will be taking you through the presentation on this call. First, moving on to Slide 4, I'm very happy to report that Believe delivered a very strong first quarter 2023 on the back of a strong Q4, 2022 quarter. This quarter has been once again fueled by very strong market share gains due to a stronger than ever attractivity for artists and labels. On a personal note, I've spent the past quarter traveling to almost all of the major music markets in the world, in the U.S., Japan, the U.K., Brazil, India, France, where I met our partners many artists and labels. One thing has struck me while I was traveling is the story is the same every you are. Essentially, there's a new generation of digital artist that is rising in all markets and established artists are becoming more digital and Believe's multi-tier model is specifically adapted and is the power of the fuel beyond our ability to attract artists and labels and grow at a faster pace than the market. Our growth has, of course, been fueled by a continued strong growth of paid streaming penetration and continued challenging environment on the ad supported market. In Q1 2023, we also expanded our set of services with our view to be able to serve artists and labels across all of their needs with the acquisition of Sentric, which is a new business line for the group. As you know, publishing is after -- with light and recording of the third largest source of revenues for artist and we do think that offers a significant opportunity for us ahead as the publishing markets become more digital. And that also signals the fact that we're now resuming our acquisition strategy and deploying the capital that we raised at IPO and that will be -- we will be continuing to deploy in the coming quarter to progress through our long-term strategy, both organically and through acquisitions. Moving on to Slide 6, the first driver beyond our Q1 strong performance is the fact that as in Q4 and the entire year 2022, we are continuing to grow our artists and labels at a much faster pace than the market in Q1, 2023, the performance of our labels grew at 18.2% above the market, right? This is only existing label. So this really reflects our ability through our expertise on developing artists on Spotify through all of the opportunities available to us there, YouTube, TikTok, Apple Music, all of our partners in contributing to grow the audiences and the monetization of our artisan labels. And obviously, that is transforming into -- due to the trust of our artists that have put the confidence -- their confidence in Believe where you have a few examples on the right hand of the slide with some top artists across the various market from Ultimo in Italy to Yunita in Indonesia or Werenoi in France. Moving on to Slide 7, besides growing artists and labels faster than the market, we've also -- this has been also a very dynamic quarter in terms of new signings and renewals across the regions and genres of music. We have a few renewals first with Jul, our top artist in France or Interbyte Media in Malaysia. These are relationships that we have renewed and extended for almost a decade now for the second, third, fifth time by expanding long-term agreements, both in artist Services as well as in label and artist solutions with artists and labels that we've contributed to grow significantly. It is also illustrated by cup of signings here like Hamza, for example, in France or Fata in Italy about being able to win artists for [ wounder's ] it's a strong market competition with -- for new signings. That is, once again, in track music that are very digital, reflecting the level of maturity that we're seeing in the market from artist seeking partners that have a similar DNA as them as digital artist developing in digital markets. And then also the ability to sign -- to upsell artists like Fabian Wegener here in Germany from one set of service, label and artist solution, which is our solution for mid-level artist to our top artist and services solutions. So between the ability to sign new artists, our ability to continue to consolidate our roster through signing long-term relationship with existing artists and competing very effectively in digital music market segments -- our growth for Q1, 2022 has been fueled by strong market share gain. Moving on to Slide 8, we've continued in Q1 and as we had in Q3 and in Q4 to deploy new [ bespoke ] per services, especially in genres music that are fully digital, b:electronic is a good example. This is basically building a capability that is dedicated to digital music for both artists and labels leveraging our expertise, our editorial teams around the world, our ability to leverage algorithm-based recommendation to accelerate audience development. Our ability to leverage long-form video, short-form video, multi-format video to develop our artist in that music, that is translating likewise in very strong artists and label attractivity with the signing -- the recent signing of Rinse in the U.K., which is one of the top local electronic music labels that is working with [ KTB ], our archives and several artists. I could also cite CR2, our Big Top Amsterdam or a few of our artists and labels. This has allowed us in the past six months the capability to break tracks globally and regionally and globally to success contributing to strong attractivity. We're launching once again, focusing on our multicare model, launching a partnership with TuneCore and Beatport to be able to extend a solution to this Europe music to artists at all levels. Moving on to Slide 10 sorry, Slide 9, the acquisition of Sentric. We've been looking at the publishing market for quite some time. Our target goal and our mission is to develop artists at all stages of their career and with a range of services that is best adapted to them. We've been looking at publishing for several years now. And because we do think it is a market that is a natural extension for us, and we're very happy to make the acquisition of Sentric in Q1, because Sentric is a global independent music publishing platform, which we know quite well because Sentric has been the publishing partner for TuneCore for a couple of years. The second reason is that we see an acceleration as you can see on the bottom left hand of the slide of the share of digital music in the pay of publishing revenues. And obviously, for TuneCore artists but share of digital music revenues is much higher. So that's a perfect fit for us. And our team in a number of territories that Believe have been solicited by artists and labels who are also publishers for a solution for us to be able to offer a solution across recording and publishing. And that is now providing us with the opportunity to build a comprehensive solution for them, which is what we're going to be working in the coming year. So developing a significant opportunity in a market that represents a significant percentage of overall music revenues and where we had ambitions similar to what we've achieved in terms of building up market share in the required music space. Finally, in Q1, consistent with our strategy, we've been continuing to develop our CSR strategy, shaping music for good across a number of dimensions, the 2 main ones of them being the -- supporting the creation of a more gender representative and inclusive music industry and investing in employees. On the gender parity side, we once again published again in Q1, Be the Change, which is our study about diversity and inclusion in the music industry to address and to raise awareness around the issues of perception gap, sexual harassment abuse, recognition, the leadership for women and our group and be able to address them an area where Believe has been leading across many dimensions and geographies. Something around investing in our teams, we believe more than ever and as we've been traveling and seeing all of our teams around the world in the power of building the best-in-class teams with the most advanced expertise. The market is changing very rapidly. Our ability to ensure that our teams have the best knowledge about how to leverage our key partners for the benefit of artist is a critical component and competitive advantage and one where we're aiming to lead. So as a conclusion, all of these elements are translating into stronger attractivity for artists and labels than ever before. Now the ability to serve them across a new dimension with publishing and has allowed us to drive continued growth and continued market share growth in Q1, which I will now let Xavier explain in number for you.

Thanks, Denis. As presented by Denis, we have another strong operational and financial performance with market share gains in all key countries and all key DSPs. The organic growth reached 22.8% in Q1, '23 versus last year. This is the same growth as in the last quarter, Q4, '22. The digital organic growth was 22.6%, slightly decreasing versus Q4, '22 as the ad-supported single-digit growth further deterioration started in November, but we maintained solid market share gains. In fact, our market share continued to grow as in previous months, but the various stores monetization performance has been impacted, especially due to economic conditions. Subscriptions bio-digital partners continue to be strong, but could not compensate a slower ad supported revenue that affected all regions, but more predominantly in the countries where the digital penetration is the weaker. The digital revenue represented 93% of our revenue in the quarter, same as last year. The non-digital sales, includes notably the physical sales that, as you know, we are carving specifically in Germany -- but also merchandising, branding and life that had a very good performance in the quarter. Let's now have a look at our performance by segment in the next slide, Page 12. So we have strong growth in all segments, Premier and automated and which is a tribute to the appeal of our model as described by Denis. In Automated Solutions where we target music creators, we have an organic growth at constant exchange rate of 9.8% versus last year in the quarter. As expected, automated Q1 performance have seen slower organic growth as [ TuneCore ] social platforms revenue share offering is also impacted by the ad supported store growth and because the unlimited new pricing as lower ARPU that is not yet compensated by the very strong ramp-up of new clients. For premium solutions, when we target labels and emerging to top artist, we show an organic growth of 23.8% in the quarter, which means also that the organic growth is slightly above the total premium solutions growth, which is 23%. And the organic growth rate at 23.8% is above total growth rate as we have a negative currency rate impact of 0.9%, mostly related to the depreciation of the Turkish lira versus euros that is adjusted for, and we have also a 0.1% positive hyperinflation effect. Just also to be clear that other actors in the music industry like Spotify 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 and YouTube. There are some positive currency impacts -- but we estimate that given our geographical footprint, that impact is very limited in the quarter. If we now have a look at the Page 13 of the -- by geography -- of the growth by geography so we gained market shares in all geographies. The geographical footprint and growth partner of the group, it perfectly illustrates our model. First, we are focusing on digital music. We're well positioned in the countries where digital penetration is lower, and thus, future growth is higher. This is illustrated by the strong growth in APAC in Africa. As Denis illustrated, we have a very strong growth in the region, and that growth reached 40% in Q1, even accelerating versus last quarter. In all countries, including mature or developed ones, our addressable markets are enlarging as more and more traditional genres that music become digital, and that leads to, of course, more opportunities. This is demonstrated by the growth of France by 13.2% when we operate across multiple music genres that are switching to digital and more clearly it is also demonstrated in Europe, excluding France and Germany with 21.1% growth, same growth as the last quarter. Even in Germany, when we are reducing voluntary our exposure to physical heavy contracts, we are still gaining significant market share in the digital market as during the quarter, we grew double-digits in digital growth in the country. We have -- the third characteristic of our model is that we serve all digital artists from the creators to the top artists in a profitable way. And this is illustrated by the growth in Americas, where we grew 25.2%, which is a higher growth than the last quarter, even despite the automated performance. So our digital focus study is based on a mix of technology solutions and music allows for better quality of service to higher P2 office and labels, leading to steady operating leverage. If we now switch to the Slide 15, that we are going to discuss our guidance, so as we demonstrated, we had a better than expected Q1 performance. However, we want to be cautiously optimistic and we maintain our guidance of an organic revenue growth of around 18%, reflecting strong market share gains, resilient paid streaming and stabilization of ad sponsored growth as it has been since the month of November 22, i.e., a low single-digit growth for the full year for the key stores. We are anticipating a higher EBITDA margin of around 5%, our central platform costs will continue decreasing as a percentage of revenue. As we are demonstrating quarter-after-quarter, our powerful model is to drive growth, gain market share and increase profitability. We will maintain our focus on investment in local sales team and central platform tech and solutions while managing actively our investment cycles to further improve profitability. The group operating leverage will continue to come mostly from the central platform cost as it has been since the financial year 2020. Regarding the cash flow, it is always hard to predict the working capital dynamics, specifically regarding the advances that are fueling our growth, providing that there is no change in the label behavior, such as what we had in financial year '21 with several Tier 1 labels asking for longer term duration at renewals. We do expect a positive free cash flow generation in the financial year '22. In the next Slide 16, we are also confirming that we are well on track to deliver on midterm objectives, which is an organic revenue growth of 22% to 25% for the period to '21 to '25. We are also expecting an adjusted EBITDA margin from 5% to 7% by 2025. This 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 target in 2023, thanks to higher revenue and console platform investments. 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.

Thank you very much, Xavier on Slide 18. It's I mean we are, so as Xavier was saying, we feel cautiously optimistic for 2023, the year ahead. We feel very optimistic about our ability to continue gain market share. We do think this is the fundamental power beyond our multi-tier model, allowing us to work with the new generation of digital orders that is rising as well as capturing month-after-month more of the established and top artists in each market where we operate. So that is making us feel very confident in our ability to continue to gain market share in 2023 through continued investment in hiring, training teams locally as well as continuing to drive innovation as we've had in digital audience development, digital marketing and promotion tools to continue growing our artist at a much faster pace than the market. And obviously, would you think that 2023 will continue to put us on track to achieve our long-term ambition of becoming the best company to work with digital artist in this new market. Thank you very much. And we'll now open the floor to questions.

The first question is from Nicolas Colisson from HSBC.

I have one question, maybe from an industry point of view. I'm just curious to get your view about the artist Sentric model. I know you already talked about it several times, but just in the light of the UMG comments about their results, just like to get your updated thoughts and whether you recognize yourself as an entity participating to the noise and the other supply to paraphrase UMG?

Very good question. So what do we think about what do we think about the topics of the value sharing. Well, we think there's essentially -- there are 3 dimensions to that debate, which are separate dimension. I would say dimension #1 is the price segmentation Essentially, as you know, there has already been going, price segmentation going on for quite a while, family plans, student plans, et cetera. And one part of the discussion is how do we create a price segmentation for super fans to be able to better monetize super fans. So I do think that we have a similar view as anyone in the music industry there, which is price segmentation, is going to contribute to increased ARPU, and that's going to be beneficial for everyone. We have more and more top artists. These artists have very engaged fans. We have a lot of entry-level honest. These entry level artists especially at the beginning of their career even tend to have stronger fan than top artists. And so, we do think that, that price segmentation is going to benefit us like it is going to benefit every single player. But the second topic is really what we call the hygiene, the cleanup of the content pool, which is essentially the limiting fake streaming, abusive content, et cetera. Same thing, which is a topic where -- which we've been fighting on for a few years now, which we do think will create well -- sorry, create value back to the people that have already handled most of these topics, as I mentioned in previous calls on all of these topics, both Believe and TuneCore are at much lower level on average than the market. And so, we do anticipate that it's welcome to benefit us once that happens. Then the third segment is really about the change in the economics and the value sharing our view there remains the same, which is every single player has a different vision on the market. And so it's going to take time to light for believe it's very simple. What we are about is we are an honest development company, and we have always made it very clear that the music market starts with DIY artist and it ends up with top artist and including top global artists. If I take one top global artist at the moment that is not with us [indiscernible] started on TuneCore, as with noticed with less than 1,000 fans many years ago, before he became a top artist. So our view is very simple is the digitization of the market as the load has created a much fair, much more diverse market. And we do think our view is that, that should obviously with a very different view on that -- from that standpoint from UMG. And we do think that DIY artists are contributing to diversity to animate the market on digital music services, obviously. So that's really how we're thinking about the market globally.

The next question is from Nicolas Langlet from BNP.

I've got two questions on Sentric. First of all, do you think with that acquisition, you have the sufficient scale on that segment or you are looking or already in discussion with other players to get even stronger, scale on the publishing platform segment. Secondly on Sentric margins, do you expect it to be neutral in '23 with the integration costs in the coming years? What do you -- what sort of margin do you expect from that business? And finally, on the generative AI tools, so there has been some debate in recent weeks on the potential impact for the music industry. Curious to get your thoughts about how this could impact the industry and how Believe is positioned on that genetic.

Thank you, Nicolas. I'll take the first and the third question, and then I'll let Xavier answer the second one. On Sentric, the acquisition was actually -- is actually the perfect set for us, because this is a platform that is probably the best rights management platform today that exists, and we've looked at a number of acquisitions in this space. So for that reason, we think it's a perfect fit for it, but it's a platform that has not yet been expanded commercially. So there's obviously a strong synergy for us in expanding the platform. We have all of our sales teams around the world to be able to acquire rights from artists and labels. So yes, one of the first thing that we're doing, that we're going to be doing is expanding the scale of the platform to be able to put more volumes and more revenues by signing more publishing administration deals in synergy with our existing recorded music business. And I'll let Xavier finish around maybe you want to finish around the Sentric and then I'll follow-up on genres the AI tools?

Yes, so regarding the profitability of Sentric, as we said, because of the integration costs, it's going to be pretty neutral for this year. For the years to come, I would say, we are going to execute the same policy as we have as when the recording side, which is a profitable growth policy, so investing in the platform, investing in local teams to expand to expand the business. So we will, as usual, manage carefully the profitability. But I don't expect it being meaningful -- meaningfully profitable versus the group because we want first to grow the business and to expand the business and not raise significantly the profitability of the business. However, long-term margins are going to be interesting for the group in the future, that's for sure.

Thanks, Xavier. And on AI, Nicolas, I think our position there is very clear. The way we're looking at it as a business is, and I think we've expressed this in the past, which is AI or technology is here, in our view, to enhance human creativity not to replace it. what does that mean for us very practically as a business is that we have deployed a number of quality controls in our business. And we do not wish to distribute and we are not to distribute any content that is 100% created by AI, [ whoever that's Believe or TuneCore. ] We have a number of quality control processes in place. We will strengthen them. Once again, our view is that AI is here to enhance human creativity, not to replace it. But the second thing is, obviously, as I think other players in the market, we view AI as an opportunity forward. It's an opportunity to augment human creativity. It's also an opportunity for monetization for the artists and -- especially with generative AI. So what we're doing now is we are doing. We are experimenting with a few of our large global AI companies around attribution because formerly, it all boils down to if a track is being created tomorrow that uses music from several artists, if we want to be able to license that track and for the original artist to be compensated. We need to know what percentage of the new song that has been created is attributable to that artist to this artist. And so, we're doing a number of experiments to see how reliable attribution models are so that then we can move on to potentially licensing and generate a revenue opportunity for the artist. We're also experimenting around how AI can be used to deepen the engagement between audiences and artist. We know that there are a number of users that do like to create content from the artist that's their way of engaging with the artist. So we're doing some tests in that area as well with some of the larger players, which -- we do think at the end of the day, is going to create an additional revenue opportunity for the music industry globally. That's really how we're thinking about it at this point.

The next question is from Lisa Yang from Goldman Sachs.

I have a few questions, please. Firstly is on ad supported I think you mentioned losing digit revenue growth in the first quarter. I was curious if you have seen any major improvement for the quarter or what are the trends you're seeing in April? It seems like the commentary and actually some of the results we've seen from the big platforms and even Spotify, I think, has maybe have been a bit better than expected or point towards a bit of improvement? So I'm wondering whether your assumption of either losing deal for the year is being a bit conservative here. That's the first question. Secondly is on the price increase, I was just wondering whether you can really share the latest in terms of like your conversations you're having with DSPs and any thoughts or I guess, in terms of like the timing of it? And more broadly, do you think the price increases were recently so and we might see this year, is that more of a one-off you think this is, again, something that could be recurring in the industry is ready to basically absorb like price increases every 2 to 3 years. That's the second question. Thirdly, just to come back on the performance and the guidance for the full year. Obviously, the 23% growth in Q1 is clearly impressive? I think you still have some impact from Russia in the quarter. So -- if you can maybe quantify that? And any reason why we shouldn't see an improvement from Q2 where you're actually nothing that sort of pressure impact and actually -- and the fourth question, if I may, just to follow up on the -- your comment around due to either AI, which I thought was very, very interesting. Can you maybe talk a bit more in detail about the controls you have in place? If you for instance the content that is not 100% AI generic, but let's say 50%, they still, I don't know, potentially using vocals from other artists without having the right to license, like how can you control it? Like I'm just curious just to understand like, can you really prevent some maybe content, which is maybe part AI-ready, which doesn't have the right license in place from being so basically using the TuneCore distribution platform?

Okay. Xavier, do you want to take the first one?

So thank you Lisa for your question. So on ad supported, I would say, unfortunately, we haven't seen any improvement since November. Yes, we agree that we had seen, for example, as announced by Spotify the ad-supported by Spotify increasing much more during the quarter. However, this is a small part of the ad-supported monetization. And so that's been largely compensated by less favorable variances in other key stores. And so, the situation in Q1 has been very stable in ad supported versus since November. And the last few weeks of April, because this is one of your question show the same trend. So we don't see at the moment an improvement. And that's why we say we are cautiously optimistic in the sense that there is no improvement, but we still have strong market share gain. And so this is the level of uncertainty we have at the moment.

Do you want to take the Russia impact as well, maybe as well?

So Russian impact so Russian impact is -- at roughly 7% of revenue. And we are -- the situation, as we said in the last quarter, we're still operating in full compliance of the sanctions and from the U.S. and UN and other countries. The situation is -- our target #1 is really to protect our teams that are operating locally. And the situation, of course, I would say, is very fluid in a sense that it can evolve at any given time. But for the moment, the situation has been stable for the past month.

Thanks, Xavier on the price increases, lease I think there's I would say there are 2 price increases, there is a general price increase with some service made last year and which we think some of the services that did not make them last year are likely to make them in 2023. As I said earlier, is that going to come in Q2 or in Q3? I don't know which, is the reason why we've not taken into account in our model, any assumption around price increases in 2023, but we do expect them to come in 2023. And then there's the second level of price increase, which is the price segmentation for super fans I was talking about, which we do think is -- are going to take something a few more -- at least a few more quarters to get developed and to move into implementation phase. On AI, I think what we're seeing and what we've experienced with so far is, I would say, AI attribution on AI is not very different from attribution of rights on content idea on YouTube, for example. It's really about analyzing a track, analyzing a voice, analyzing the -- how new track -- is being made up about, like what various components are being made up from other tracks. And we do think that there's, a couple of attribution models out there that are sophisticated enough are not far from to be able to really have very precise attribution models. And so, we do think that, yes, the ability to say this track is X percent dishonest, X percent dishonest, X percent dishonest. Is would you think that the technology is actually here today. It's just -- it's not been yet get deployed. There is same thing for the controls. You have technologies out there in the market today that are allowing that can -- detect an AI-generated track with 99.9% accuracy versus a human created track. So something where we feel very good with the fact that the ability to control is going to get -- is there. Now it needs to be deployed everywhere - like we need to finalize the testing. We need to deploy there, but these technologies exist and are there. So how much time is it going to take to put them in full deployment probably a quarter maybe 2, but we do think, ultimately, the ability to control both potentially revenues as well as quality control the distribution is very high.