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

Good afternoon, this is the conference operator. Welcome and thank you for joining the Believe Group's Full Year 2023 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Duni Ladegaillerie, Founder and Chief Executive Officer. Please go ahead, sir.

Thank you very much, operator. Welcome, everyone. I'm happy to sit down with you to report a strong set of full year results for the third time for third year since our IPO. This sets of result is characterized by solid organic growth, showing acceleration in Q4, a strong profitability improvement throughout the year as we scale and positive free cash flow in the second half of the year. Believe's mission is to develop artists and labels at all stages with expertise, respect, fairness and transparency. What does that mean? We source artists and labels at early stages and support them in becoming established artists and labels. Once established, we support them in their journey to become top artists or labels in their market segment. Once at the top, we support them in reaching new heights. From a business model standpoint, we aim to maximize the commercial potential of our artists and labels, music and brands by supporting them creatively and in developing their audience and we participate in their commercial success. The more value we create in partnership with our artists and labels, the more we participate in the value we have created together. That is at the core of what we've been doing in 2023 and what we are going to do in 2024. Invest and innovate to create more value for our artists and our labels at all stage. The more value again we create for artist, the more we can participate in value creation. We do this at the top of the market by investing in breaking more artist in the top 200 and operator, sorry, actually, if you can go to Slide 4. Sorry, apologies for this. So we do this at the top of a market by investing in breaking more artists in the top 200 than ever before in Believe's history. That is a big part of our investment and the areas where we have gained the most market share in 2023. We do the same, investing in premium solutions with continued investments in teams and innovation that translate into growing our labels faster than the market again and at TuneCore with Tunecore accelerator. Lastly, in 2023, we started expanding our services with the acquisition in Sentric that we are now building to become belief publishing. From a financial standpoint, our investment in music and technology in 2023 have translated into a strong adjusted organic growth at 19.5%, increased adjusted EBITDA margin of 5.7% that reflects the investment in and the transformation of our model, creating more value to extract more value, a continued efficiency drive and naturally the scale effect. Do you want to go to the next slide please? After posing investment in sales in H1 2023 to adjust to slower growth, the group has resumed its investment in the second half of the year in building local teams to develop and support top artist in top 20 global markets, especially in Europe and Asia. The group gained additional market share in most key market and is now positioned as a top 3 player by digital music market share for local acts in key European and Asian markets including 4 of the top ten global music markets, Japan, Germany, France and India. As you can see on this slide here in France, Believe proved that it has become the best new artist development capacity in the French market with 5 debut albums in the top 200, ranking number 1 on local acts with a 29% market share of the top 200 albums with 42 albums in the top 20, sorry, top 200 in 2023 including WeRenoi here on the picture, the most streamed artist in France. We also had in Germany Raf Camora, a Believe artist with whom we've renewed a long multi year relationship as the most streamed artist and also 48 albums in the top 100 weekly album charts through the year. Lastly, we had our first number 1 global single with Si no estas by Inigo Quintero through a partnership with the artist and our labels, one of our Spanish label. These success at the top are being achieved in a wider variety of genres of music, as you can see, of course in hip hop, but also in pop, in metal, in local pop. In the next slide, we've continued to strengthen as you know, the second geography where we invest in is Asia, where we have continued to strengthen our leadership position, especially in the 3 largest markets in the zone. In China, we've continued to build our teams and expand our capabilities with success driven by strong local partnerships with local music digital services. In India, we've continued to pursue our investment across all business line, entry level, established top artists and also strengthen our presence there with the acquisition of White Hill Music, a leading catalog of Punjabi music, original soundtracks from a long standing commercial partner of Believe. And in Japan, where we started to foray in last year, we launched our premium solutions and most recently PLAYCODE, which is a new dedicated imprint targeted at top local hip hop artists, a genre of music that is starting to gain share locally. Next slide, we've also continued to deliver significant growth, growth above the market growth to our portfolio of existing label partners. As you can see on this slide here, 35% above market growth driven by an increase in our marketing and promotion investments across all platforms. This is also a great illustration of what I was describing earlier, moving from distribution to full label services and expanding significantly the value that we do create for our labels and being able to participate in a deeper way in that value creation, taking full advantage of our in house media technology platform for media buy and our global editorial teams in more than 50 countries. We have also continued, as we do each year to selectively strengthen our portfolio of local labels. A couple of examples here with Mahogany recordings in the U.K. or most recently with the privilege to partner with [ Marquee Label ], Bella Union in the U.K. That drive to create -- to ever create more value for our artists and labels is also one that we are applying to the new artist at TuneCore where through 2023 and continuing in 2024, we are now deploying a number of artist development program and marketing program at early stages for large number of artists. These programs in the past quarter only have helped 10,000 artists increase their stream by an average 143 -- 133% compared to the previous quarter, driven by marketing investments across a large number of platforms from TikTok to YouTube to Spotify and others. Lastly and as a core commitment for Believe, we have continued to build our shaping music for good program. As you know, we've had very strong focus is on gender equality. As a reminder, 50% of Believe board members are women, 50% of our comics are women at party and another commitment on training. 94% of our employees in 2023 received on average 11 hours of training during the year. That is a key driver of how we build expert team to support of our artists and labels. And I will now let Xavier take you through the numbers.

Thank you, Denis. Hello to everybody. So let's jump to Page 12. 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 despite currency headwinds. The organic growth of 14.4% and the organic growth adjusted for market embedded Fx of 19.5% demonstrate that fact. We had currency headwinds throughout the year with a peak in Q3, but we have also strong resilience market growth, driven by price increases despite still depressed, ad sounded streaming monetization as expected. The digital revenue represents 90% of our total revenue versus 92% in financial year '22. The 10% of non-digital sales are growing 48%, driven by publishing live and branding. We reached 5.7% EBITDA margin versus 4.6% last year, driven by a better amortization of the Central Platform investments and also controlled investments locally. We are already at mid-term IPO objective level. We have also free cash flow that is almost as breakeven with minus EUR 3.1 million. We had a strong positive H2 cash flow after H1 that saw significant attractive opportunities to sign or renew deals with labels and top artists at much better conditions for us. Let's now have a look at our growth per quarter jumping to Slide 13. The quarterly trajectory in terms of growth showed deceleration of growth throughout the year with a rebound in Q4 '23, which grew 21.8% in organic growth adjusted from embedded market Fx. As I said before, we had significant negative FX exposure embedded in the market, stemming from the appreciation of Euro versus almost all currencies. After three quarters of deceleration driven by lower ad supported revenue leading to lead growth in emerging markets, the last quarter have seen higher growth rate versus Q3. Organic digital sales in Q4 grew 13% with an easier comp on ad supported and also subscription price increase. We also benefited from strong non digital revenue organic growth of 38%, leading to a total Q4 organic growth of 15.7%. Our market share continued to grow at a higher pace in Q4 than in Q3. Let's now go to Page 14 to see the performance bar segment. So we have growth in all segments, Premium and Automated, which is a tribute to the appeal of our model based on digital innovation and differentiated positioning as explained by Denis. So the Automated Solutions which is targeting music creators have a total growth of 14.6%, including 9.9% organic, a negative Fx impact of 2.8% and a 7.6% positive impact of centric integration on new publishing platform. As expected, Automated Solutions had a lower organic growth in financial year '23, driven by lower ad supported monetization, but also because the new pricing we rolled out in 2022 had led to lower ARPU not yet compensated by the ramp up in new clients. We introduced several initiatives in H2 '23, including price increases or as Denis also illustrated, the new TuneCore accelerated. That led to a much stronger Q4 20% organic growth in Automated. Premium Solution, that is targeting labels and emerging to top artist show a 15.8% growth versus last year, which translate into a 20.1% adjusted organic growth, so without the embedded effects. We have been taking market share throughout the year despite negative effect and depressed ad supported monetization that affected markets where the digital penetration is the lower. We benefited from DSP price increase, notably in Q4 and also from an easier comp on ad supported monetization, but as expected we have not seen significant ramp up of ad supported monetization at the end of the year. Adjusted premium organic growth rate is 20.1% as I said and include a negative 5.4% estimated Fx market embedded impact, a negative 1.4% currency rate impact in total revenue, mostly related to the depreciation of the Turkish Lira, against a 2.6% perimeter effect essentially from Sentric and almost a neutral 0.2% positive hyperinflation effect also related to the Turkish Lira. If we go now on Page 15 that shows the performance by geographies. So we gained market share in almost all key geographies and a geographical footprint and growth pattern of the group illustrate our model. We focusing on digital music, well positioned in the countries where digital penetration is lower and thus the future growth is higher. This is illustrated by the strong growth in Europe, excluding France and Germany of 25.9%. The region benefited from the Sentric integration, but as we celebrate also the 10th and year anniversary of our presence in Eastern Europe, the revenue was driven mainly by the strong performance in that sub-region and also by Turkey. This is also illustrated by APAC Africa when we grew 14.9%. That region has been strongly impacted by Fx by a lower ad funding monetization and a lower DSP price adjustment. As mentioned by Denis, we've launched our full service offer in Japan and we made an acquisition in India which will help our future growth in the region, in a market that is still less booming than the past years, but that demonstrated strong resilience. In all countries, including major developed ones, our addressable 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 14.9%, reflecting a strong Q4 at 33%. Q4 has been positively impacted by the strong live business activity and as the leader in local music [ new acts ] on the market, we also depend on the rescheduling of our artists that were significantly higher in Q4 than in Q3. In Germany, we are reducing voluntary, our exposure to physical heavy contracts, but we are still gaining digital market share in Q4. Thanks to our multi-shared approach. We serve all digital artists from music creators in Automated to the top artists in Premium, all that in a profitable way as shown in the Americas region growth of 17.4% driven by Brazil and Mexico and of course they resume strong growth in TuneCore in Q4. If we now go to Page 16, you can see how we drove investments during the year. Our digital focus that is based on a mix of technology, solutions and music allow for differentiated positioning, digital innovation, translating into a higher appeal to artists and labels and steady operating leverage. We are constantly deploying new teams to address new music genres on new business lines or new types of artists or labels. We have strong operational control as our blueprint is very well defined. As you know, each team is made up of 4 to 5 individuals and each team takes circa 2 years to reach breakeven. We have then strong control of our execution and when our revenue numbers do not reach the planned levels, then we reduce our investment level accordingly until we reach the expected profitability for each team. As we expected monetization to be lowered, we decrease our investment levels as you can see from almost 5% last year to 3% in financial year '23 and we continue to work on efficiently leading to higher segment EBITDA margin as we will see later. The second driver of our profitability is the Central Platform, which is key in our model and we go to Page 17. So Central Platform, one of the key driver for Believe differentiation and innovation. Central Platform provide a technology and the solutions not only the tools but also the processes, the structuring management that power the business lines in the country. 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 that provide the framework to manage our business and resources. And the sales team that design and enable the commercial offer and organization and provide management tools that are then leveraged at local level. Central platform cost is not driven by volume, but more a function of the number of products we deploy, the number of business lines we are managing, the number of countries we operate in or even the number of businesses we acquired. As the group expanded massively in 2019 and 2020, finalizing its multitiered approach with the launch of Artists services in 15 countries or splitting Artists Solutions from Label Solutions, the Central platform increased significantly as a percentage of revenue these years. The Central Platform is still expanding in real terms as we want to continue investing in new solutions and continue to be at the forefront of innovation, as Denis mentioned. However, the Central Platform is decreasing as a percentage of revenue as a reminder in '20, we were at 17.2% of revenue, and we are now at 10.4% in financial year '23. In financial year '23, the Central Platform grew by only 3% in total cash term, as we roll out efficiency plans and we postponed also some projects to '24. We do expect to invest more in '24 as we prepare for the next growth phase and we have exciting opportunities around audience development and data, but always carefully managing our Central Platform costs over revenue ratio. If we now go to Slide 18, you can see how that translate in EBITDA margin improvement. The group EBITDA margin trajectory is a function of, a) the segment EBITDA margin, i.e., the margin pre-central platform cost, as we lower investments to reflect lower growth by 190 bps as we saw before, the segment EBITDA margin grew only by 40 bps because of the weaker revenue leading to slower ramp-up in Teams profitability. The Central Platform costs as a percentage of revenue that is decreasing and that is the one that normally contribute the most of the expansion of the group EBITDA profitability is the second driver of our EBITDA margin trajectory. By a careful management of our cost investment level, we've been able to drive operating leverage, which explain why we are reaching our mid-term objective level, almost 2 years ahead of the plan despite lower growth in financial year '23. If we now go to Page 19, we see what was the free cash flow performance of the business during the year. After increased advanced investments in H1, H2 saw significant cash flow generation. As you remember, we had a negative free cash flow in H1, mainly because of the working capital variance, that reflected further investments in advances to artists and to labels. Because of our positioning and quality of service, as well as the current environment, we've been able to extract more value from key partners, mostly label center parties, with higher margins and higher contract durations. Advances have a very high ROI much more than most of the other type of cash allocation, including M&A. So we size those unique opportunities. The longer-term contracts led to higher advance paid translating into a 40% recruitment ratio within 1 year versus 51% last year, as shown in the table below, the last row of the table. The assumption for the full year was that those behaviors coming from labels will be a limited window of opportunity that we had to size in H1. That assumption has been right, as we saw in H2, deal negotiations leading to more standard advance rate and terms. H2 has the strong cash flow generation, helped us more some favorable DSP term negotiations. CapEx costs are decreasing -- have been postponing some projects in the Central Platform, leading then to an almost neutral free cash for the full year. For the record, our M&A spend is EUR 70 million roughly, below the EUR 100 million target. As announced, we pushed some conversations into '24 to carefully manage our free cash flow, focusing more on advances. Now let's turn to Page 21, regarding the guidance. So as an tradition for the guidance, as you know, Believe is the object of ongoing discussions around the potential change of control of the group. At this stage, the company is not in a position to assess the potential impact on its business and financial condition, linked to the uncertainties created by the current situation. So to be clear, the guidance provided does not take into account any of those potential impacts. So we are now expecting an organic revenue growth of around 18% and FX embedded revenue growth, organic adjusted for FX then of 20%. We assume resilient at streaming an uplift from future DSP price increases in H2 '24. We also assume a recovery of ad-funded growth in H2 '24. And we expect a soft Q1 and that is going to increase performance than in the following quarters. We are anticipating an higher EBITDA margin of around 6.5% as Central Platform costs will still be decreasing as a percentage of revenue. As we are demonstrating quarter-after-quarter, our powerful model is to drive growth, gain market shares and increase profitability. We will maintain a focus on investments in local sales team and Central Platform taken solutions, while managing actively our investment cycle to further improve profitability. The group operating leverage will continue to come marking from the Central Platform cost amortization as it has been [ 6% to 20% ]. We expect a slightly positive free cash flow generation, assuming a stable level of terms and conditions on our contracts as we've seen in H2. On Page 22, we are confirming that we are on track to deliver our mid-term objective, an organic 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 even mostly on a better amortization of the Central Platform cost and as you can see, we should be close to the iron bracket target in '24, thanks to control investments. The long-term EBITDA margin for the group of 15% after hyper growth phase is also unchanged. Now, I let Denis to conclude the presentation.

Thank you very much, Xavier. One simple conclusion, as you have understood, in 2024, we will essentially continue executing on our strategy as presented at IPO, 1, drive solid organic growth; 2, gradually increase profitability, supported by continued investments and innovation to create more value for our artists and labels and participate in their success. We will now open the Q&A session and answer your questions about the annual performance and outlook. I want to precise that we will not take questions about the ongoing offer process during this earnings call and remind you that the information available to date is included in the press releases that have been issued over the last few weeks. Thank you very much.

Thank you, sir. This is the conference operator. [Operator Instructions] The first question come from Mr. Nicolas Cote-Colisson of HSBC.

First question is on the working cap. Can you just help us on what we should consider for 2024? Because I think you just said in line with H2. So just to be clear, I'm sorry if I didn't catch it properly. And also, you made a comment about higher return on investment from advances compared to M&A, although you are saying that you would consider more acquisitions in 2024. So how can you reconcile the 2? And then not talking directly about the deal, but this is what is in your press release. You mentioned business -- potential business disruption or uncertainties from the discussions. What are you referring to? Is it about artist not willing to engage? Or is there something else we should consider? And very last, again, talking about the deal, but not about the details of the deal, can you just help us with the time line for the AMF to review the questions from the Board?

So I'm not going to answer your question 3 and question 4. You have all the necessary information that has already been disclosed either in the various press releases. So I'm just going to answer your question 1 and 2. I'm going to start by #2, which is M&A versus advances. As we are -- we discussed during previous earnings, the difference between advances and M&A is that advances have a very recurring high ROI and you have a faster payback. So in the capital allocation as a company, we tend to say, first, we deliver on advances and if we have good opportunities, we size them. And then, of course, we do M&A. So we're not saying that we are going to cut completely 1 or another. What we're saying is that what we did in '23 is that because we size very interesting advance opportunities, then we said, okay, we are going to cut back a bit on M&A, postponing some discussions in '24 because we want to have enough cash to be able to finance or advance opportunities. So that's the reasoning that we are making. And the assumption is that for '24 is that we are going to have to pay less advances versus revenue in '24 because we think that the H1 was super strong and was more, I would say, as I said before, like unique windows of opportunities because H2 have been much more regular in terms of conditions that have been there. Having said that, we do say also that we are going to invest in advances because at the end of the day, we are guiding towards a neutral free cash flow, slightly positive free cash flow, if you will, because we think that our job is to be able to finance the growth of the business with high ROI advances, with also extra [ IBG ] but also extra investments that we can make in the teams and that this is how we want to use our cash. And M&A is below the free cash flow. We have dedicated, as you know, envelope for M&A. Our target is still to spend EUR 100 million a year, where a lot of opportunity is there, but we select super carefully those opportunities depending on the way we want to strategize the business.

And on the working cap for kind of volume for 2024, some kind of indications?

You can -- I think you can do the math actually. You can -- because to get to neutral free cash given the EBITDA, you can deduct the working cap quite easily.

[Operator Instructions] The next question comes from Julien Onillon of Stifel.

3 questions to start with. To come back first on your Q4 particular sales and the Automated Solution, you have a strong jump in Q4, 20% and I believe it's linked to your new marketing program that you launched in the fourth quarter. So, it seems to be a great success. What do you anticipate for the full year of 2024 on the specific TuneCore business? Should we expect a growth remaining to 20% as we have seen effectively in Q4? So that's my first question. Second question, still on Q4. You have a strong raise on non-digital sales in Q4, up only more than 70%. I would just like to try to understand what happened there? Is there any specifics? And now coming back a bit on the depreciation and the below, I would say the EBITDA. You mentioned that depreciation was 61% for the full year and it was 21% in first half, which mean that the depreciation has been moving from EUR 20 million -- EUR 21 million to EUR 40 million in H2. So what's happened really there? Is it exceptional? I try to understand what's happened? And what are the other through below the operating profit in term of financials? And also, do you have a positive, I guess, when you get the net earnings, a positive impact on the tax element on the aspect, just to start my first question, I will have also more question on the prospect, but those 3 questions to start with.

So expectations for Q4, so yes, Q4 performance in TuneCore was driven by a price increase and the new markets and programs that are actually not all that have an impact on the performance of the business. We do expect the growth of TuneCore of the Automated and TuneCore business in '24 to be in the range of what has been happening in Q4. That's at least -- that's a target that we have there. And just to complete around this is, it's really, as globally, I was explaining our strategy, the core of our strategy is to create more value for artists because when we create more value for artists, then we are able to participate better in value creation, that is the same for TuneCore. So we are moving to core from a large scale, low value-add business to a very targeted, very targeted business targeted at new and up and coming artists with potential that we are helping develop. So basically, the acceleration of growth that we're seeing and that we're expecting in 2024 reflect these two elements, acquisition that's targeted at higher earning artists and labels and the ability to better participate in the value that we're creating for them. Xavier, do you want to pick up the second question?

Second question was on non-digital sales. The non-digital sales jump, you have 2 effect. You have the Sentric effect publishing the digital sales and you have a line effect that specifically in France because France is the only country when we are operating live business. So this way, the 2 effects that explain the performance in Q4 in non-digital sales. Below EBITDA, sorry, I haven't -- I don't know what you are referring to. It is true that depreciation have increased versus last year. But because it's just a matter of the M&A and PPA allocation because the depreciation of our capitalized cost is roughly the same as you know, we are stable there. So the difference in depreciation comes from the allocation of the acquisition price of many.

Yes. But just to come back on that, in the first half, you had EUR 21 million of depreciation overall. And then you speak in your press release about EUR 61 million, which means that it should be in H2, EUR 40 million. So it's why I'm lost. So do you mean -- and Sentrics was -- I mean, the only M&A you have done in Sentric, I would say, recently, the biggest one. So do you mean you have done an exceptional depreciation somewhere is why I was a bit lost there. It was my H1, again, H2 in term of depreciation I don't know if you have the numbers, but it looks strange for me.

Well, let me revert to you, I don't recall any exceptional depreciation, so I think it's really allocation, but let me revert to you on this one.

And on the tax because it appears to be effectively a positive impact on your earnings?

Yes. It's a positive impact as we had some different taxation -- different taxation improvement that led to have this positive impact. But the positive impact is not recurring by definition we should have -- we are -- we have, sorry, negative income tax as we are paying -- we are paying taxes in some countries despite the fact that the group is loss-making.