Cliq Digital AG (CLIQ) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to Cliq's Full Year 2022 Video Conference Call, which is being recorded, and a replay of the call will be available later on our website. After the presentation, Ben will answer questions sent in by e-mail prior to this call. I will now hand over to Ben Bos, who will lead you through this conference. Over to you, Ben.

Thank you, Sebastian, and good afternoon and a warm welcome to our full year 2022 results presentation. I'm Ben Bos, Member of Cliq Digital AG's Management Board. I'm joined today by Sebastian McCoskrie, our Head of Investor Relations. Today, I will walk you through the highlights of the year and our financial results. Then we will answer the questions you have kindly submitted to us by e-mail. Ladies and gentlemen, the Cliq Digital Group concluded 2022 with excellent results, annual sales of EUR 276 million, with growth up 84% in 2022 on the previous year. EBITDA grew by 60% to EUR 44 million. That means we overachieved our revised 2022 guidance on both sales and earnings. And on top of that, we also exceeded market expectations. On bottom line, EPS earnings per share was EUR 4.47 on the back of EUR 29 million profit for the period, a growth of 59% year-on-year. And analysts' median estimates were, therefore, exceeded by EUR 0.20, an upside of 5%. EUR 4.47 EPS allows us to propose a dividend of EUR 1.79 to our next Annual General Meeting on April 6 in Dusseldorf. And of course, I'm very happy to announce that. That's in line with our previous 40% payout ratio and a return -- a dividend yield of 7.1% on the year-end closed share price. Besides that, we also grew our staff numbers further. At the end of 2022, we had 35 additional employees on the payroll, enlarging our workforce to 164. We are extremely happy with our 2022 results, and a big thank you goes out to all our talented teams who helped achieve this and make us more and more relevant. So going forward, we will continue to build upon this great momentum and grow our business further, and 2023 has already gotten off to a great start. Looking further ahead, we are very well on track to meet our midterm outlook of EUR 0.5 billion in sales. That's aiming for a compound annual growth rate of over 35% since 2021. So let's go to the business model, ladies and gentlemen. And just recently, we gave our corporate website a makeover and I highly recommend having a browse through the pages. And aside from the new look and feel, we have described our business model more clearly and explained our main approaches and defined our corporate vision. At Cliq, we want to bring simplicity to the streaming market by offering subscription-based streaming services that bundles content categories. The current streaming service offers -- leaves consumers feeling overwhelmed by the ever-increasing number of content category-specific stores available to them, let alone the rising cost and number of streaming services needed to access the available content categories. So it's time. It's time to break through these content category boundaries and give everyone access to one simple streaming solution. No more having to pay for 5 different memberships or endlessly scrolling through content that people do not really need, but instead have just one membership for 5 streaming content categories, so movies and series, music, audiobooks, sports and games. So our corporate vision is to create all-in-one streaming services that allow you to watch, listen and play the way you want it and bring simplicity to the streaming market. For us, simplicity means one service, one price and one log-in that goes beyond content categories and profiles. And how do we go about doing that? Our approach is threefold. Firstly, we license our streaming content from partners across multiple categories, ranging from movies, series, music, audiobooks to sports and games. We source global content as we localize content in many different languages from all around the world. We continuously enhance both the quality and quantity of our content offerings to improve the members' user experience. So secondly, we bundle and curate our digital content by combining the content with our data-driven marketing knowhow and business intelligence. What do we mean by that? Well, simply, we simply analyze trends to understand the streaming market and consumer demand. And from our many years of marketing experience, we can translate user behavior and performance data into actionable insights. We do all this in our, as we call it, the Cliq tech-up, which enables us to create our attractive streaming services. And at the last but not least, we sell the content through our own streaming services. Over the years, we have become both experts and specialists in online advertising and creating streaming services that are advertised towards specific consumer groups. We spark the interest of the online consumer in our streaming service via a well-designed banner, followed by a membership offer, which starts with a free trial period. Nowadays -- today, we have numerous streaming services across more than 30 countries, resulting in 1.9 million paid memberships at the end of last year. Now online advertising, and this leads me to our next slide and the basis of our number of recent investor and press inquiries, which are always, "Name your URLs, domains, web portals," et cetera. But we deliberately don't. And why? Because if we did, we could lose our competitive advantage. Online advertising, or to be clear, performance marketing requires the use of multiple categorized marketing domains to secure that different offers are being placed with the right publishers for the right target audience. We don't share these marketing domains because they contain crucial information and knowledge of where and how we advertise our services and the way we set up our campaigns. Our competitors, which are not necessarily other streaming providers, but definitely are the online advertisers would be able to see on which domains our advertising banners are shown, allowing them to directly compete with us on one or more specific domains. This, as you all understand, could lead to an increase in pricing for our online advertising, or even worse, we could lose the specific ad placements as competitors might be able to pay a higher price than Cliq. And that's why we don't disclose our secret sauce. Ladies and gentlemen, the group owns and operates numerous streaming services in all operating countries. And important to remember here is that our membership turns a profit within the first 6 months. These services provide both single and bundled content streaming entertainment services, whereby the bundled content services constitute by far the majority of the group sales. Our strong track record in building streaming services has brought us closer to achieving our dream, our flagship streaming services, cliq.de, which makes streaming content accessible to everyone in Germany. Ladies and gentlemen, here we are showcasing some of our streaming services. In general, our single content service targets specific niche audiences, for example, audiobooks and music content, specifically for kids, or scary movie content for horror fans, whereas our bundled content services offer a wide-ranging entertainment bundle for the whole family. In Germany, we advertise one service, which is cliq.de, our most advanced bundled content streaming service for the German mass market. It makes affordable streaming content accessible to everyone in Germany. This service, as you probably know, went live on the 15th of December last year. And to be honest, it's too soon to properly gauge the initial success of the launch as the full marketing campaign support is still to come. The marketing campaigns to support performance marketing of the services will commence with a soft launch in the current quarter, which -- and it just did with TV commercials and an increased reach of the out-of-home advertising campaigns in the second quarter. cliq.de is jam packed with great content. We have newly licensed content from a number of well-known reputable suppliers and beefed up all our content categories. Amongst others, we have Hollywood blockbusters, films and series from New Regency, Leonine, ZDF and Wildbunch; documentaries from Speigel, Waidwerk and Authentic; as well as special interest programs and dedicated children's entertainment. Aside from the hundreds of playlists, our music category includes live contract recordings, upcoming karaoke and localized music channels to include, for instance, popular Schlager music. Our audiobook and audioplay library includes all relevant German book publishers and caters to all tastes. Live football matches from around the world, including the top games from the Italian Series B and ATP tennis can be watched, as well as the niche sports such as motor and action sports, eSports and horse riding. And last but not least, games. And this category has huge potential. We currently offer over 500 high-quality cloud and browser games. The genres are wide ranging with something for all family members. cliq.de is truly all-in-one streaming. Let's go to the German price point comparison slide, the next slide. We do not like to and cannot really compare ourselves with other streaming service providers as we follow our own very different strategy. However, on pricing in Germany, we are practically unbeatable, EUR 6.99 for 5 content categories bundled into one service. The rarity of our strategy and business model is key. And as you can see here, the market supply is very much focused on 1 or 2 content categories. Therefore, offering a wide range of family entertainment for an affordable price makes us stand out from others and clearly supports cash strapped household budgets. Our key differentiators. And as I already mentioned, we are very different from the well-known single content categories streaming profiles. And here, we have summarized on one slide what makes Cliq different from others. I believe I've touched on most of our key differentiators already in my speech. However, one question does pop up regarding our churn rate, and which is an integral part of our economics, of our business model. Cliq is well accustomed to shorter membership durations already from back in the day when we were selling ringtones and jokes of today, believe it or not. But we generally focus on more profitable conversions. That's very important to us. At Cliq, we are growing faster than the digital media market and faster than many well-known streaming providers. We are a growth company with a proven successful and profitable business model. And our favorite evergreen slide here very clearly showcases this over the last 16 quarters by our focused metrics. Important to point out here are the trend line courses, which illustrates the widening spread between strong marketing spend growth and ever strong sales growth, clearly underscoring our time-tested mantra, which is more marketing means more members, which means even more sales. Let's have a look at the sales breakdown. In 2022, nearly 90% of our total sales were bundled -- successful bundled content streaming services. And compared with the prior year's share, you can really see what the growth driver bundled contents are for Cliq. Geographically, sales grew significantly across all our regions. North American sales doubled and now constitute nearly 60% of our total sales. European sales grew year-on-year by over 60% and Latin America already contributed over EUR 3 million in sales in 2022, which looks very, very promising to us. We also doubled our marketing spend in 2022, as you can see here on the left, and we'll continue increasing it going forward. As you probably know, our mantra by now, which is more marketing leads to acquiring more members, which leads to generating more sales. And the marketing growth derived from broader targeting options of the bundled content service on Google. And Cliq's numerous streaming service offer 1 product across the 5 most popular content categories. This means the group's marketing angles, our advertising sources, can be widely explored. On top of that, Cliq was able to add globally other advertising platforms, media sources and exchanges to find the group's target audiences. Our 6 months profitability index was 1.4x compared to 1.59x in 2021. This year-on-year decrease was related to a general increase in customer acquisition cost across all regions, including the new market entry into Latin America. On the right side, we show the number of paid memberships and the present value. The lifetime value of customer base, or abbreviated LTVCB, at the year-end 2022 grew to EUR 140 million, which is an increase of EUR 54 million compared to last year. The higher LTVCB was the result of the increase in the number of paid memberships to EUR 1.9 million and the higher share of bundled content streaming services with our total sales -- within our total sales. So let me now -- ladies and gentlemen, allow me now to walk you through our financials and let's start with the income statement. The sales growth in the full year 2022 was positively impacted by around 7% currency effects, mostly from our U.S. dollar exposure. In 2022, our increase in cost of sales was significantly driven by the higher marketing spend to acquire more members, as well as by higher content cost to enlarge and improve the content offerings in our streaming services. Operating expenses grew mainly due to the higher IT costs caused by the increased content and member traffic as well as by the 30% higher FTE numbers. Below EBIT, the financial results reflect the higher interest charge for credit facility drawdowns and leases. And the effective income tax rate in 2020 to remain stable compared to prior year and came in at 29%. Bottom line, basic EPS was 63% higher against prior year at EUR 4.47. And this, again, as I mentioned earlier in my speech, allows management to propose a dividend per share of EUR 1.79 to the AGM in Dusseldorf on April 6. Now let's go to the marketing cost. In full year 2022, our marketing costs doubled. However, in the fourth quarter, especially at the end of the quarter, we were faced with higher market prices for our online advertising. So as not to pay the seasonal elevated market prices, we reduced our marketing activities, which subsequently led to slightly lower growth rates for both sales and paid memberships in Q4 against the full year. But incidentally, due to the discontinuation of our business activities relating to the ad-funded digital marketing service in Q3, the share of marketing spend in Q4 which was capitalized was 100%. Going forward, this share will come down again as brand marketing costs are incurred, and those, as you will understand, cannot be capitalized. Cash. And cash is still king as always. And operating free cash flow in 2022 came in above EUR 50 million despite our greater marketing spend, which you can see here in the change in net working capital for contract costs and investment in both content and platform developments. Last year's record cash outflow of over EUR 7 million for dividend notwithstanding, we ended 2022 with a EUR 10 million of net cash position. Let's have a look at the balance sheet. And looking at the balance sheet, our total assets grew to EUR 135 million, driven mainly by our contract costs. The equity ratio at the end of the year amounted to 60%. Our goodwill amounted to EUR 47 million, and the annual impairment that's performed on the goodwill did not result in any impairments to be recognized. The increase in other intangible and financial assets of EUR 7 million was mainly due to the newly licensed content and platform development investments largely related to cliq.de. The increase in the net deferred tax liabilities is largely attributable to the increased temporary fiscal differences related to the contract costs, which is the result of the increased marketing spend in the reporting period. But in a nutshell, a solid balance sheet with a net cash position and a strong positive cash flow, enabling us to have an attractive 40% dividend payout policy. So ladies and gentlemen, let's now look to the future. We achieved a lot in 2022, even though it was a challenging year for many streaming consumers and providers. But in 2023, we will become stronger and more relevant. We expect to exceed EUR 345 million in sales and generate an EBITDA of at least EUR 50 million. Our underlying marketing spend is thereby forecasted to be above EUR 120 million. And what do we expect to drive this strong outlook? Firstly, our increased marketing spend, which will fuel our expansion in both current and new countries. Additionally, we see us becoming more relevant, thanks also to both our cloud gaming offer and our convenient bundled service propositions. Market-wise, we expect higher Internet penetration rates and bandwidth to drive sales in streaming services further. And cash strapped consumers are very likely to search for better value for money also in streaming services. So management gladly reiterates the group's midterm for continued high profitability and significant market growth in all regions and business areas, all thanks to our future marketing campaigns. We expect to increase to EUR 0.5 billion by the end of 2025 with the underlying number of paid memberships ranging between 4 million and 5 million. Ladies and gentlemen, with regard to sustainability. At Cliq, we believe that streaming services should not come at the expense of our planet. Starting this year, we will create the company's sustainability profile. The project will measure the group's carbon footprint, strengthen our talent management policies and will improve our governance by further implementing transparent and sustainable business practices. Cliq will engage in a dialogue with its most relevant stakeholders around sustainability issues to define both the financial and nonfinancial materiality of business model -- the business model. And all in all, we expect the project to provide a holistic picture of our material impact and deliver Cliq's baseline to measure our sustainability approach. Our current motto is Level Up Together. Consequently, our task now is to build on the momentum we have created and increase as well as deliver results in 2023. We are focused on achieving our ambitious financial and nonfinancial business objectives and will pursue our growth course in the coming years. Thank you so much. So thank you so much for your kind attention, and I shall now begin our question-and-answer session.

Our first 6 questions are from an anonymous e-mail sender. So let me begin. First question, how high is the share of unintentional subscriptions in revenue?

Well, the share is 0. The 1.9 million paid subscriptions are intentional as they have passed the free trial period and gone through numerous security checks during the registration process. Nevertheless, we also have a clear no nonsense cancellation policy. If a member requests a refund, that's what he or she gets. But allow me to describe a typical user journey. The potential member is informed about the main characteristics and other relevant details of the streaming services before purchasing the services. So to be clear, he or she is informed about the price of the service, including the frequency of the payment collection; the service being a subscription; contact details of the customer care service; possibilities for the termination of the service; the address details of the service provider; hyperlinks to the general terms and condition contract details; frequently asked questions; terms of use; and a notice on the cancellation rights. At the moment of purchasing, robust opt-in mechanisms are also in place. So with regard to mobile billing, double or triple opt-in procedures are in place. And with credit card billing, users have to fill in their credit card details, followed by a security code and possibly also 3-D secure confirmation. So after becoming a member to our services, all members will receive a welcome text message or a welcome e-mail message, which contains the main characteristics of the services, including pricing information, billing frequency and how to cancel the service and the customer care contact details. So with regard to mobile billing, in some countries, our members also receive weekly or monthly billing reminder messages, which includes also our customer care contact details.

Next question, which third party partners generate traffic and subscriptions for the various portals and how high is their share of total revenue?

We have a long-standing partnership with numerous advertising platforms, Google, Facebook, Instagram, TikTok, et cetera, who enable us to address our target audience. We do not disclose the individual contribution to our sales. However, we can say that the majority of our marketing spend goes to Google. At the moment, we don't advertise on Google search, so keyword buying. When we talk about Google, we mean only advertising via Google Display, so banner and video ads on multiple websites, apps, games and YouTube. However, going forward, we will broaden our targeting options for the bundled content service on Google. Cliq's numerous streaming services offer one product across the 5 most popular content categories. This means the group's marketing angles and advertising sources can be widely explored. On top of that, Cliq has been able to add globally other advertising platforms, media sources and exchanges to find the group's target audience.

Can Cliq Digital rule out the possibility that its offers are being improperly advertised, for example, via modified apps such as a QR scanner?

In 2019, the group took the strategic decision to internalizes its media buying. We did everything internally since then, or most of our traffic buying, and set up its own house media buying team in order to prevent third parties from altering and tempering with our ad campaigns, which we encountered previously. So in addition, Cliq offers are advertised in line with rules of the specific advertising network. For example, with regards to the Google advertising policy supply. Furthermore, the QR apps are mostly free apps that sell their banner inventory to Google. So the Google algorithm determines which banners are being placed in the apps. There are some generic filters we apply such as COVID, politics and children, but we cannot exclude specific apps. The owned media buying is a success and was implemented in our U.S. business and is one of the driving forces of our North American growth story. Since then, we have been rolling out our own media buying across Europe and experiencing similar success.

Which payment service providers does Cliq digital use?

External payment service providers play a crucial role in billing and fulfillment of the company's subscription-based streaming entertainment services, including the invoicing of services through credit cards, telephone bills and prepaid accounts. However, we do not disclose their names for confidentiality reasons. Ultimately, the billing takes place via mobile network operators like Vodafone and T-Mobile and for credit card payments via banks like Worldline and Worldpay.

In which countries are the marketing costs paid?

We paid the marketing costs according to the terms set by the marketing partner, who is being paid directly by Cliq.

Okay. And last but not least, through which subsidiaries is the U.S. business operated?

CNBV, Dutch entity and Nate Inc. was the U.S. based company. The nature of our business model allows us to operate those marketing and services URLs remotely. But that's important for you to note that means we do not need operational staff to be located in operating countries.

The next question was kindly sent to us by Kevin Oats. He writes or ask, "The section on operational risks and your dependency on external service providers states that you depend on one single service provider for the income from digital entertainment services. As this segment constitutes roughly 97% of your revenues, could you please elaborate on this single partnership? How come Cliq is still dependent on one partner? In which country is the partner based?

Thank you, Kevin, for this question. We work with a number of external service providers organizing the billing, collection and technical fulfillment of our streaming entertainment services. Indeed, one business partner will work as an intermediate partner between the acquiring banks and Cliq, who represents the significant part of our bundled content streaming services revenue. However, for sure, not 97% of the total group revenue. This partner is also a chance for customer care and the reconciliation of the revenue from the different acquiring banks. Again, for confidentiality reasons, we do not disclose the business partners organizing the billing, collection and technical fulfillment for our streaming entertainment services. The actual billing is being done by 25-plus acquiring banks and 25-plus mobile network operators, leading to payment diversification.

Kevin, the second question is, as the potential noncompliance with laws and regulations of this single service provider is further identified as a risk factor, is it possible or planned for Cliq to migrate to a different service provider anytime soon?

Thank you, Kevin, for this question. And yes, Management is aware of this concentration risk and is currently working on establishing the following mitigating activities. Diversifying income sources through new partnerships with other external service providers, developing a contingency plan that includes alternative methods of payment, and of course, strengthening its relationship with existing service provider to ensure a smooth payment processes, and increasing the frequency of payments collected. Despite these efforts, the company will remain watchful in monitoring the concentrated risk and taking further action necessary to minimize any potential impact on its financial performance.

Our next question comes from Christian Meis. I'm invested in Cliq, and as an invested person, I tried the streaming service of Cliq. Cliq wants to be comparable with Netflix, Spotify and so on. When I use the app and searched for my normal music content like Rammstein, [ Oomph! ], I was not able to find anything. Will that improve? If yes, how and when?

It's very flattering to be compared with the likes of Netflix and Spotify. But it's not quite right for fit. At Cliq, we sell subscription-based streaming services that download movie, series, music, audiobook, sports and games to consumers [indiscernible]. cliq.de is our most advanced all-in-one streaming service for the mass market, which makes streaming content accessible to everyone in Germany. Our licensed music content is offered via hundreds of curated playlists, including, amongst others, metal, Schlager, pop hits, classical, jazz, basically all genres for all different tastes. But due to the nature of our license agreement, and of course, also to keep our content costs down, we currently don't have the possibility to jump to the next track within our playlist. This is something, of course, we are currently refueling and helping to implement in the near future. In addition, we want as a further improvement to cliq.de to enable skipping directly to tracks in our live concert recordings and introduce a karaoke feature.

The next question comes from [ Bart De Milano ]. We are on the brink of a new era in information technology with the implementation of artificial intelligence in popular online features. How does the company evaluate this and anticipate on this development? What are the risks and the benefits for this industry and your business model? Can it support in the search for value-oriented consumers and the battle for market share?

ChatGPT, Bard, et cetera, demonstrate a very interesting and user-friendly development. At Cliq, however, we currently target our ads via display and not search. So in other words, the browser behavior of potential members triggers Cliq's ad banners and not their search results. Nevertheless, we are striving to diversify the platform for our placements and we'll be advertising also via search in the future. And then Bard and ChatGPT and whatever else comes along can also be utilized by Cliq to target new members.

Bernd Kesling asks, "How is the total generated revenue broken down into individual platforms, enterprises, money sources?"

Thank you, Bernd. In general, we report our sales quarterly by services and by region, as I just presented in my speech. In full year 2022, 90% of our sales were paid with credit card and the remaining 10% is mostly paid via direct carrier billing that means via mobile network operators. I also mentioned that Google currently receives the lion's share of our marketing spend. And regarding enterprises, the majority of Cliq's group's revenue is generated by our Dutch subsidiary, CMind B.V..

Andreas Blom from MediumInvest asks, first off, as the North American segment has now become your largest segment, I would like to ask if you can give some more flavor on your American operations without disclosing your domains, of course.

Sorry, Andreas, we don't disclose our domains. And why? Because if we did, we could lose our competitive advantage. So going back to your question, online advertising, to be clear, performance marketing requires the use of multiple categorized marketing domains to secure the different offers are being placed with the right publishers for the target audience. We don't share these marketing domains because they convey crucial information and knowledge on where and how we advertise our services and the way we set up our campaigns. Our competitors, not necessarily other streaming providers, but definitely other online advertisers will be able to see on which domains our advertising banners are shown, allowing them to directly compete with us on one or more specific domains. This could lead to an increase in pricing of our online advertising or even worse, we could lose the specific ad placements as competitors might be able to pay a higher price than Cliq. And of course, that's what we -- that's why we don't disclose them.

Furthermore, Andreas asked, "For example, knowing how many different bundled platforms you currently leverage in the North American market would be nice. If you have a single platform that contributes to the majority of the revenue and earnings to address the offering concentration risk and anything else you are comfortable sharing with us on the earnings call about the region and its operation will be highly appreciated."

Thank you, Andreas. In North America, we operate both single content and bundled content streaming services, whereby the bundled content services contribute by far more sales to that region. Unfortunately, Andreas, we do not disclose our active service portals. On our corporate website, we give examples of both single and bundled content service, and the exemplary customer journey from ad banner to registration, which hopefully helps you understand how we operate.

Furthermore, in Q4, we experienced a further deterioration of the gross margin, which fell to 24.6%. Can you give some flavor on how this should be interpreted?

Well, we are continuously increasing our advertising volume and up until the fourth quarter '22, also at slightly higher ad prices. However, in the fourth quarter, the ad prices we typically pay were even more elevated, which led us to the tactical decision to not advertise at any price. But consequently, our target number of paid memberships fell short of our guidance. And RPI performance index was slightly lower than the full year 2022 number. So in the '21 number, excuse me, 144 versus 145. This was a business decision taken in order to protect our gross margin in Q4 and realize more as an absolute amount.

His next question is, would you expect this gross margin deterioration to continue into 2023? And if not, why?

Well, we always take a cautious stance with regard to guidance. So currently, we have factored in an elevated market price for our marketing spend as well as additional brand marketing costs for cliq.de.

And last but not least, I know it is still early to measure anything, but can you give some flavor on the performance of cliq.de so far? And maybe any customer experiences you have come across so far?

Andreas, yes, and to be honest, it's much too soon to be able to speak about performance. The launch took place on the December 15 last year, and we are currently ramping up our marketing activities, both performance and brand marketing. So the first TV commercials are now online, and we have our first out-of-home ad installed at Frankfurt Main Railway station. But it's early days.