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

Good afternoon. This is the conference operator. Welcome and thank you for joining the Believe Third Quarter 2023 Revenues Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Denis Ladegaillerie, founder and CEO. Please go ahead, sir.

Thank you very much, operator. Welcome everyone to this third quarterly call. If you can move to directly Slide 3. Xavier Dumont, our Chief Financial and Strategy Officer and I will be presenting today. Moving on to Slide 4. In the past quarter, as we have since our IPO, we've continued delivering on our core goal growth strategy: build scale, innovate to differentiate and drive efficiencies. We are relentlessly focusing on building leadership positions in key markets, that is top one to top 3 positions in Europe and in Asia, to differentiating for innovation in artist development with our partners, and driving operational and financial efficiencies during the past quarter. While we have continued to gain market share, our revenue growth has been negatively impacted by a strong euro and persistent, soft ad funded monetization in important geographies for business that Xavier will expand upon in the second part of this call. I want to pose to highlight 3 things. The first one is that FX and ad-funded monetization impacted us as we had anticipated. It's not better, it's not worse. Two, our growth has remained very strong in constant currency and we continue to gain market share globally. Three, we have adapted, during this period, our execution to increase our profitability as planned. We expect adverse market conditions to start reversing in Q4, 2023, and we now anticipate a progressive acceleration of our growth driven by our investments and our favorable competitive positioning in a number of markets. If we can move to the next slide, please. In Q2, Believe has continue to increase market share, as I was mentioning, by breaking more artists across geographies to the top of the charts, but as well by supporting faster than market growth for our roster of mid-level artists and labels -- I'm sorry, I said Q2, obviously it's Q3. On to the next slide. In this, as illustrated the gain of market share in driving breaking many top charting artists, breaking artists to the top of the charts from different geographies is illustrated here with examples such as Grupo Frontera in Mexico reached #1, Nadhif Basalamah, an Indonesian artist was currently #5 global viral charts on Spotify, or as we are now listening to this call, Inigo Quintero, which is a young Spanish artist who's currently the most stream artists in the world on Spotify in the #1 position. This is the first time in the history of Believe that we've had a #1 Billboard cited artist, where we have leveraged the expertise that we built in the past quarter, and we expect to have more of them as we build our expertise further and better coordinate our global teams. The growth on the next slide is also again illustrated by the growth of our existing portfolio of labels with 51% growth of our existing roster above-market growth. That is, as usual, demonstrate our ability to accelerate growth of our existing portfolio of clients. So while global growth in euro numbers is decreasing, we're still driving very strong local growth in all markets where we are present. And on the right hand of the slide, we also continue to drive a very dynamic sales strategy and execution on artisan labels illustrated here with a few names in Europe, Asia and Latin America. Going on to the next slide. We continue, as I mentioned earlier, to focus strongly on our core markets in Asia and in Europe. In Asia, we recently celebrated our 10-year anniversary with the leading market position in the country. India is a textbook example of Believe development model where we started 10 years ago. We had one consultant where we now have several hundred people on the ground, combining a model of strong organic growth and the buildup of local teams with very targeted acquisitions, all issued from our proprietary pipeline. India is expected to become one of the fastest-growing markets and largest potential music market and the top 10 global market with paid streaming users anticipated to be multiplied by almost 6.5 by 2030. Moving on to the next slide. In Q3, we have also continued to be heavily engaged on exploring AI opportunities in the market with our global digital partners. We also developed what we mentioned a couple of calls ago, and we have developed and actually deployed -- it is in production right now and functioning -- a proprietary AI tool called AI Radar to be able to detect tracks created by generative AI or using deepfake. This was developed internally by our own teams that have expertise in AI and audio recognition. This tool is now able to detect master recordings with a 98% detection rates and deepfakes with a 93% detection rate, allowing us to provide control of the content and protection to our artist as GenAI becomes more widely adopted. In the last slide, next -- the next page. Lastly, as always, as a core component of our strategy, we've continued to deploy to our CSR plan, centered around talent development. We had more than 1,300 people who participated in various initiatives in the past months from how to help artists with mental health issues all the way to developing local internal and external talent. Another example being BEAMS in India, a program where we provide grants for 2 years to develop the next generation of music executives in partnership, including mentoring and training. So core message is we've, through the past quarter, we've continued to deploy our strategy, and I will now let Xavier run the strategy and numbers. Xavier?

Thank you, Denis. Hello to everybody. So let's go to Page 11. So as presented by Denis, our Q3 organic growth has been impacted by currency headwinds and weak at standard streaming. The currency headwind come from the euro appreciation versus almost all currencies. The revenue we get from DSP, the digital service partners, are paid in euros monthly, but they are translated from local currencies. And as announced in our H1 results, that's led to a negative impact of 9.1% on premium solution digital revenue during the quarter. Premium solutions adjusted organic growth will be almost 17%, and organic growth for the group adjusted would be 15.4%. In fact, our market share continued to grow, but the various stores monetization performance has been impacted essentially due to economic conditions. Subscriptions via digital partners continue to be strong but could not compensate the lower -- slower ad-supported revenue that affected all regions, but more predominantly in the countries where digital penetration is the weaker. Digital revenue represents 92% of our revenue in the quarter, same in year-to-date. The non-digital sales include notably physical that we are curbing specifically in Germany, mechanizing, branding and live. Even if we're still growing at a lower pace than past years, as you can see on the right-hand side, our revenue has been almost multiplied by 2 since 2020. Now let's have a look to our growth by segment. Let's go to Page 12. Premium solutions that is targeting labels and emerging top artist show a Q3 organic growth of 16.5% adjusted for FX embedded in the market in the revenue paid by the DSPs. Q3 has been a slower month in terms of growth, especially linked to a lower weight of emerging territories in our mix with lower ad-supported monetization. Our year-to-date performance adjusted for market FX has been solid with 19% growth with market share gains in more geographies. The automated solutions that is targeting music creators has an organic growth at constant exchange rate of 0.6% versus last year in Q3 and 6.2% in year-to-date. As expected, automated has been -- have seen slower organic growth as TuneCore Social platforms revenue share offering is also impacted by ad-supported revenue growth and because the unlimited new pricing has lower ARPU, not yet compensated by the strong ramp-up of new clients. Let's go then next page, Page 13, to see what is our performance by geographies. Even if we gain market share at group level, the FX embedded impact and the lower level of ad-supported monetization are changing the growth pattern of the group for the quarter. Our main growth area this quarter is Europe, excluding France and Germany, with strong growth in Southern Europe, Eastern Europe and Turkey. These -- that geographical area benefits also from the Sentric integration, but the majority of the growth is organic. APAC and Africa performance reflect the strong FX headwinds and the weak ad-supported monetization in the quarter, even if we are still growing 17% year-to-date. We launched during Q3 premium solutions in Japan. Japan is a top 5 digital market globally with a digital rate penetration of 20%. We are today operating in Japan with TuneCore Japan with a significant market share, but the market is also starting to show digital genres gaining traction. We are thus deploying premium solutions organically in the country with our usual blueprint to serve labels and artists. Americas is up 8.4% in Q3, 17% year-to-date with very strong activity in Latin music, but a drag from automated operations we discussed previously. In France, the quarter has been soft in digital sales and more brilliance in the live and branding business. Commercial dynamics remained strong in terms of signing and renewals. Germany, we've been negative year-to-date by almost 2%. We have been less dynamic in digital sales, and we have a drop in non-digital sales as we are moving away from heavy physical contracts. As mentioned by Denis, our digital focus based on a mix of technology, solutions and music allows for better quality of services, higher appeals to artists and labels leading to steady operating leverage. Let's go to Slide 15 to demonstrate that operating leverage. As anticipated, Q3 has been softer in terms of growth, and Q4 is expected to show higher growth. We are confirming our guidance of 14% organic growth for the year, reflecting market share gains, resilient past streaming enhanced by price increases, slight recovery of ad-funded growth and persistent currency headwinds but losing intensity. We are anticipating a higher EBITDA margin, and we now guide towards a margin of at least 5.5% versus circa 5.5% in the latest last guidance, driven by controlled investments and efficiency. We are also confirming that we continue sizing high-growth, high-return commercial opportunities versus M&A in H2 '23. The Q3 new advances commitments have been lower than in Q2 as expected. So we also confirmed a positive free cash flow for H2 '23 with a negative free cash flow for the full year. If we go to Page 16, we are on track to deliver on our mid-term objective, an organic revenue growth of 22% to 25% for the period 2021 to 2025, and 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 over revenue. And as you can see, we should be above the lower bracket in 2023, thanks to higher revenue and controlled investments. The long-term EBITDA margin for the group of 15% after a hypergrowth phase is also unchanged. Now I'll let Denis conclude the presentation.

Thank you very much, Xavier. Well, as a conclusion, Q3 has been a challenging quarter from a growth standpoint as we had expected and anticipated. We expect, as Xavier mentioned, adverse negative conditions to start reversing. We have seen them starting to reverse. And as we've continued to invest in our core model, in innovation, differentiation, new services across fast-growing geographies, we believe that all of these investments made in the past quarter, combined with more favorable market conditions will contribute to drive accelerated and profitable growth in the coming quarters. Thank you very much. We are opening to questions.

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

A few questions if it's okay. Maybe just starting with sort of the headline growth guidance. Obviously encouraging to see you reiterate the 14%. I think you said before that that would be sort of organic adjusted of about 19.5%. So the first question is just to confirm the sort of if we did try to do a sort of upstream adjustment for currency. We're still looking for roughly that 19% to 20% organic growth profile. That was the first question. The second question, I think, inevitably is on sort of the changing landscape. We've obviously seen the proposed move from Visa, which I think will kick in from the fourth quarter, i.e., the sort of the new -- the new deal, comprehensive deal that was announced in conjunction with Universal Music. Have you seen any impact of that on your business? Or do you think that broadly should be neutral? I'm conscious that France will be a big market for them and possibly a bigger market for you. So you might have -- might see more of an impact. And then very finally, on the automated side, just interested in some prospects for the fourth quarter there. Should we expect an acceleration in growth there given the dynamic is possibly slightly different? It's driven less by music sales and sub-numbers and more by the number of artists on your platform direct.

Xavier, do you want to take 1 and 3, and I'll take 2?

Yes. Thanks. To answer your question, yes, we have -- our guidance and our expectations in terms of FX is still the same. So I confirm that we should be around 19% adjusted for FX from an organic standpoint by the end of the year. That's the target, yes.

Do you want to take the third one on automated?

On automated, we expect a slight recovery. We think that we -- that it's a low point. However, the FX, they are still going to continue to have a negative FX exposure. They are still going to continue to have ARPU also lower even if we have a few functionalities that is going to be -- to impact a bit. So yes, we do expect that it's going to be better, but it's not going to be significantly better in Q4.

And on the question number two, I think, Tom, the UMG-Deezer deal is the UMG-Deezer deal commercial deal period. We've had conversation with Deezer, we have told Deezer that we would not move to the new model because we think that it's not been well thought out all the way, and it needs to work. So we're continuing that dialogue with them. I have to say that they have provided us with modeling on the same type of deal that they have announced in the market. Based on that modeling, we would gain almost a significant -- actually, a very significant double-digit growth in terms of market share there on the service market share gain. So it would actually be very favorable to us as a business. Nonetheless, we do think that this is not the right model. We're understanding in the model is that at least one of the other major record label thinks the same way as we do and a number of other independents. So we don't expect that model to be deployed to certainly not to us and not to the entire market until we think that there is a model that makes sense for everyone and just to establish the basis of a fair and more diverse market in the future.

And just one follow up on that maybe. I mean how can they succeed with that model that one else signs up? Presumably, they can't just arbitrarily sort of double the…

Well, I think it's -- the view around this is they have proposed to one of their partners one model that makes it, I don't know, whether more expenses, less expensive for that partner to acquire content. From our standpoint, it's -- our view is we have different objectives in our deal renegotiations. So the question is, as usual, they in effect that from the people I've spoken to, I do think that right now, you have less than 50% of the market that's looking at that -- that views that model unfavorably. And so I think it is creating -- it is -- once again, I don't know what they've negotiated, but it might create a challenge for them. So we told them that we were looking to help them so but we have very different objectives when we negotiate our deals with DSP, whether it's Deezer and others and that any commercial negotiation has to start with the -- has to align the interest on both parties.

The next question is from Christophe Cherblanc of Societe Generale.

The first question was on Q4. You are expecting an improvement in Q4. I just wanted to dig a bit and whether you think that's just the comps getting much easier or do you see an underlying improvement in market conditions in your key countries? That's the first question. The second one was on the price increases that we've seen from platform. They've been staggered over time. So what's your best estimate of the impact on your revenues in '23 and '24, given your mix? We don't know your mix by platform. And given the carryover impact of those increases, does it mean that the 20%, 25% of range that Xavier was mentioning, do you think that '24 will get back into that range on an FX-adjusted basis? And the last one is just to come back on what the point raised by Tom, did you say that you would have seen a double-digit share gain or a double-digit revenue uplift? Because in that case, I'm struggling a bit to see why you would decline such an opportunity given that it seems pretty attractive.

So let me start maybe where the last one is. It's a double digit. We would see our current market share grow by a double-digit number, especially percentage. So why are we declining it? Because we don't think it's the right thing to do. It's if it's about -- I mean this is -- at the end of the day, this is a commercial negotiation and also thinking around establishing a healthy base for the future. So we don't think yet the model establishes that basis. I think it establishes -- it's a very -- so let me go back maybe for one second. It's in the double-digit gains, if we look at the proposal, there are 2 components. There is one component which is essentially cleaning up the market. So fighting streaming fraud and streaming abuse. And that is the bulk of the impact. Streaming abuse and streaming fraud has been much higher on Deezer than it is on other services on Spotify or Apple Music. Which means that as soon as you start tackling that issue, you'll have a significant redistribution to the players that have not been behaving right. And it's contributing to the bulk of the gain. And then you have a very marginal movement that is related to the different allocation [ BP ] on streaming front. And that's extremely marginal. That moves less than 1% of the value across the market. So what we do think is -- of course, we are supporting very strongly all of the actions on the streaming fraud, especially once again on Deezer as it was high because that's what we've been fighting for. On the value sharing, our view is, hey, all this for this, which is why would we bother just moving 1% market share globally and not in the right way, we think. So that's an ongoing conversation that we've had for over a year. That's going to likely going to continue, and which, once again, is part commercial negotiation, part how do we elevate that basis. And so that's one. Just on your first question, Christophe, on why do we expect the growth to accelerate in Q4, it's a combination of -- growth has been slowed by weaker ad-supported monetization. We see that monetization starting to improve in a number of markets. FX, we see -- as the euro has been very strong, and we're starting to see improvements there as well. And then we're continuing to see very strong sales dynamic as we were seeing earlier. We have more and more artists at the top. We're currently #1 of the global shorts that have never happened before. We have several artists in the global charts. As we speak now in a number of territories, we have significant numbers of top 10 Billboard charted artists. So that's contributing to market share gain. And so that better ability, that commercial driver, we think is also going to contribute to accelerated growth in the coming quarters. If you want to...

On last question, Christophe -- but I'm not going to comment on 2024. I still have mid-March to do so. So I will use that opportunity there. Let me just emphasize the fact that price increases by the main digital stores have been concentrating in what we call major countries and less on emerging for the simple reason that emerging DSPs are favoring the digital penetration, so much more subscribers. So it's -- those increases are, of course, nice and have an impact. But the main impact for us is really the growth of the market, the growth of the digital penetration and, of course, the ad-supported revenue growth. And so this is really the main factors that are going to drive us for '24. But it's still too soon to comment on that. Even if we have positive factors, we still have to see how Q4 is going to -- and the final year is going to turn out. And what's going to be the trajectory from an ad-supported standpoint because as Denis said, yes, we see a sign of recovery. But as you know, in ad-supported, end of the year is an important period. And so having that information would be quite useful for us to see how 2024 is going to turn out.

The next question is from Agnieszka Pustula of Redburn Atlantic.

So I've got 3. First one, I was going to ask about the revenue slowdown in France and Germany. That's looking quite weak comparing to previous quarters and last year specifically. So if you could give us a bit of an outline as to what is driving that slowdown. Is it market share that's maybe falling there or is it market more generally in these regions that's slowing? And then secondly, I think you did comment on some development of some technology around generative AI and attribution models for content generated by AI. I'd really appreciate if you could give us some update on that. And then just finally, I was going to ask about the guidance for 2024. But given that you must be ready yet to give us any outline there, if you could perhaps only comment on FX impact maybe in Q1 and the whole year. How is that looking as where we are now?

I'll take France and Germany...

Yes, take France and Germany, and I'll take the GenAI.

So you're right that the France and Germany growth for the quarter has been weaker, but this -- there are 2 different dynamics there. The dynamics we have in France is the dynamic, which is really around the top artist market and the commercial policy and the release schedule. So we've been quite successful in the past quarters in France with very strong release. That's not -- and we had a good Q3 last year. So this -- what means is that we've been gaining market share overall, but not in Q3 really. But we expect that Q4 is going to be much stronger. We have, as an example, last week, we had 4 albums and 4 singles in the top 10 in the French market. So that's -- the quarter seems to be more dynamic in Q4. In Germany, this is more, I would say, structural in a sense that we are curbing our physical contracts. You may have -- you may remember that I said that it was slower than expected for several reasons. One of them is because you still want to maintain very good relationship with labels and with artists. And so we -- but of course, we are making progress here, and that's why you see a negative growth actually for this year in Germany total. And even if you're still growing in digital, the non-digital part of the business, which was represented a significant part of the business is, of course, decreasing. So that's why you have that dynamic in Germany. We do think that we are going to continue because from a profitability standpoint, that's the right decision. So the right decision in terms of positioning the market. It's the right decision in terms of focus. And we are going to continue in the next weeks doing so.