Sleep Cycle AB (publ) (SLEEP) Earnings Call Transcript & Summary

Good morning, everyone, and welcome. Today, we are sharing the interim report for quarter 4. My name is Erik Jivmark. I'm the CEO of Sleep Cycle. And with me, I have Elisabeth Hedman, our CFO and Head of Investor Relations. We are Sleep Cycle, the world's leading sleep technology company. And part of what is so great with our product is that all it takes is a smartphone to use it, no additional hardware purchases. We are available on all common smartphones and wearables in 150 countries and 13 different languages. Every night, we have more than 1 million active users, helping our users to fall asleep faster thanks to our Sleep Aid, waking up gently with the help of our patented Smart Alarm. And also, we help our users to analyze and provide insights to their sleep habits. We are a subscription-based business with a strong growth potential. Let me break down why we are a compelling investment. Our core business is highly profitable with predictable recurring revenues and an annual dividend of 40% to 60% of net profit. We are the most used sleep app, backed by science and also patents with 80% organic customer growth and partnerships with leading sleep research institutions such as the University of Cambridge. Also, the sleep tech market is worth roughly SEK 17 billion and growing. With increasing awareness of sleep's impact on well-being, our addressable audience includes anyone with a smartphone. Going forward, we're expanding through revenue management, geographic adaptation, strategic partnerships and also exploring new revenue streams. Our strategy that we presented last year remains focused on three key areas driving our growth. We continue expanding our reach by improving upper funnel traffic and increasing Sleep Cycle's visibility across more channels. In Q4, we've conducted price increase tests, which we will accelerate in Q1. We see positive signs on sale but it has a negative impact on user growth. I believe we will see an impact when we continue to adjust the prices in the coming quarters. In Q4, we also ran successful campaigns converting free users to subscribers. Although we are at an industry average when it comes to churn, our focus is on conversion, customer engagement and retention. This includes win-back campaigns for churn users, continuous product innovation and also strengthening our core technology and data reliability. In Q4, we released successful win-back offers as well as new technology for full sleep staging, which was a world first. We will look into moving this feature to premium-only to try to further differentiate the offerings between free and subscribers. And finally, we will be intensifying our work to find new revenue streams by leveraging our technology and platform. A key milestone is our breakthrough world-first noncontact full sleep staging. The technology behind this innovation allow us to take the next step, exploring medical-grade certification for sleep apnea screening. This is exactly what we mean when we talk about the untapped potential in our technology and platform. We will get back with more details and time lines. The first two focus areas is us doubling down on our core product. Sleep is ours to own. The third, it's an area that could fundamentally transform our business over time. If we take a closer look at our data and technology, Sleep Cycle is already delivering value to millions of users by leveraging the insights we gather. Right now, we're exploring how other companies could use our technology to build their own sleep experience tailored to their users' needs, powered by Sleep Cycle. This could apply to apps that serve a different primary purpose but where sleep is a key factor in helping their users achieving their goals. In these cases, they wouldn't license our app or our user experience, only the core technology that powers it. The same applies to data. We're actively exploring a web version of Cough Radar to drive product awareness, and we're also exploring the potential for others to purchase anonymized data. It's still early days, and I will keep you updated when we progress in the coming quarters. In Q4, sleep tracking took a giant leap forward. For the first time ever, we're using breathing and movement to deliver full sleep staging, completely contactless, no wearables needed, just the sound of your breath and movements. Every night as you drift into sleep, something quite extraordinary happens. Your body rests but your brain doesn't. It processes the events of the day, it consolidates the memories and it's also, in a way, orchestrating the rhythm of your sleep cycles. Now with breakthrough precision, our AI-driven algorithms can detect and reveal these patterns, giving our users a deeper understanding of their nights than ever before. This is again a technical innovation, building confidence for us to explore the medical-grade certification for sleep apnea screening. So smarter sleeps insights with the same effortless tracking, that is pretty much the future of Sleep Cycle. Partnerships play a key role in our strategy. We talked about it before. It helps us expand into adjacent segments and it also strengthens our local market presence. By collaborating with the right partners, we are not only extending our reach but we also reinforce our position as a leading authority in sleep. Our partnerships take different forms. Some are very commercially driven while others deepen our expertise in sleep science. But they all serve one overarching goal: customer acquisition with highly cost-effective customer acquisition costs. Last quarter, we announced our latest partnership with MyFitnessPal. While we didn't go live as planned due to this being a new type of partnership which was out of our control, the opportunity remains ahead and we just went live with parts of the offer. It's too early to say anything about the potential impact. Looking at the financial targets. We are strengthened by the successful 2024, and hence, we are updating our EBIT target going forward to 25% or higher on an annual basis. We're still committed to doubling the revenue in the midterm, and the dividend policy is unchanged. We are combining profitable growth with an attractive yearly dividend. And with that, I'm handing over to you, Elisabeth.

Thank you, Erik. Now let's take a look at some of our financial KPIs for the fourth quarter. And after that, I will walk you through the P&L for both Q4 and the full year of 2024. So year-over-year, the number of paying subscribers grew by 2.8%, adding 25,000 net subscribers, bringing the total to 918,000. This growth is the result of our focused efforts on customer acquisition, converting free users into paying subscribers and the positive impact of our existing partnerships. At the same time, ARPU increased by 2.6% to SEK 279. The growth in ARPU was slightly slower in Q4 mainly due to our successful strategy of converting the free users into paying subscribers, many of whom start at a discounted rate. While this initially affects the ARPU metric, it's a positive long-term development as it expands our paying customer base and strengthens our revenue. And looking at the net revenue, we saw a 9% year-over-year increase reaching SEK 66.8 million. And the EBIT for the quarter came in at SEK 21.5 million with an EBIT margin of 32.3%. We're very pleased with the strong margin, which reflects our ability to grow revenue while maintaining disciplined investments. 2024 has been a year of solid growth in both paying subscribers and net revenue, as illustrated in the charts on this slide. Our base of paying subscribers, shown to the left, has now grown for 6 consecutive quarters. In Q4 alone, we added 3,000 net paying subscribers. And on the revenue side, seen to the right, net revenue has increased consistently throughout the year. Given Sleep Cycle's subscription-based business model where revenue is recognized over time, our reported revenue reflects the sales from the past 12 months. For Q4, the revenue growth was 9% while the full year growth was 10.7%. And looking ahead, we -- as Erik mentioned, we plan to conduct additional price testing to better understand the customers' willingness to pay. And this might lead to a short-term slowdown in the subscriber growth, but it's a crucial step for strengthening the long-term net revenue growth for Sleep Cycle. All right. Let's take a look at some highlights from the P&L for Q4. The fourth quarter was marked by continued growth and a strong EBIT margin, and the growth was driven by expanding subscriber base and a higher ARPU, with our partnerships continuing to contribute positively to the revenue. The growth was 9% or 8% when adjusted for currency effects. During this quarter, we also made strategic investments in new initiatives, and one key area is our exploration of medical-grade certification for sleep apnea screening, a process that we have now initiated. And these investments will continue in 2025, and we look forward to sharing more insights as we progress along the road. And looking at the other external costs, they were SEK 1.7 million higher in Q4 compared to last year. And it's important to note that in 2023, the marketing was handled in-house. Whereas in 2024, it has largely been executed by external consultants, which is reflected in our other external costs. And during this quarter, we continue to refine our marketing strategies, but we're still evaluating how to achieve the necessary return on investment before scaling the spend further. And regarding the staff costs, we had an average of 34 employees in Q4. That's 3 fewer than previous year. For depreciation and amortization, keep in mind that last year's figures included a SEK 6.3 million write-down related to Sleep Cycle Kids. So the EBIT margin for the quarter was 32.3% supported by revenue growth and disciplined investments. And at the end of the period, our liquidity was SEK 145 million and the cash flow from the operations were SEK 17.3 million for the quarter. Let's summarize the year of 2024. It was an important year for Sleep Cycle as we made several fundamental changes to position the company for profitable growth. We brought the team together under one roof in Gothenburg, we launched an updated strategy and established a nearly new management team. And these steps have helped lay the foundation for further growth and the exploration of the new revenue streams. And from a financial perspective, 2024 was a strong year. The net revenue grew by 10.7% with FX-adjusted revenue growth at 9.8%. Given that we are a global company with a significant portion of our sales in U.S. dollars, currency fluctuations impact our results. By comparison, the FX-adjusted growth for 2023 was 3.1%, highlighting an improved underlying growth rate this year. And the revenue growth was driven by an expanding base of paying subscribers and higher ARPU and successful partnerships. When it comes to profitability, we maintained strong margins, delivering an EBIT margin of 29.4% for the full year or 31.6% when adjusted for nonrecurring items. And while we will continue to invest in strategic initiatives, we remain committed to EBIT margin discipline. In line with this, the Board has updated the EBIT margin target for Sleep Cycle to at least 25% annually. Sleep Cycle's solid financial performance allows the Board to propose an attractive dividend for our shareholders. At the end of the year, the liquidity was SEK 145 million with free equity at SEK 74 million. The Board is proposing a total dividend of SEK 60 million or SEK 3 per share, consisting of two elements: first, an ordinary dividend of SEK 1.85 per share, which is at the higher end of our policy range of distributing 40% to 60% of the net revenue -- net profit, sorry, back to our shareholders; and then there is also an extraordinary dividend of SEK 1.15 per share. And with that, I'll hand it over to Erik, who will walk you through some key takeaways from today's earnings call.

Thanks, Elisabeth. All right. So looking back at 2024, I'm, of course, pleased with the progress we made. We've had consecutive quarters of growth, being able to improve both revenue and number of paying subscribers while also having a very healthy and increasing EBIT margin. And at the same time, we delivered groundbreaking technology innovations, such as the one we shared at today's call with contactless full sleep staging. Going into 2025, we will of course continue to look for partners in adjacent segments. We will also do the price adjustments. I, of course, anticipate that this will impact our subscriber growth for the core product, but we do this in order to grow sales and revenue over time and also to be able to create room for tactical offers during onboarding of new users and as well as when we're trying to convert free users to paying. We will also put additional focus in our strategic areas, leveraging our platform to see if we can achieve medical grading for non -- contactless sleep apnea screening. We will also put extra emphasis on data monetization and explore if we can sell our technology, allowing others to be powered by Sleep Cycle when they build out their products. Thank you so much for your support. And with that, I'm happy to take any questions that you might have. So we will look in the chat.

All right. Should I read the question to you, Erik? And you can an answer.

Yes, sure.

Erik, if you for a moment look into the crystal ball, where do you see Sleep Cycle in 5 years in terms of product offerings? What natural feature expansions or new functionality do you envision as part of the platform's evolution?

So I think it's a very good question. I mean, we have the core product and the core product is doing great. We are constantly investing in product development for the core product. Those are the first and the second pillar in the strategy that we are doubling down to, that we continue to invest in. Then we have the third pillar in the strategy, which we refer to as technology and platform and data. And here, as I shared on today's call, I know that a lot of the partner discussions that we have today around the possibility to offer Sleep Cycle to their users, part of those discussions are also, in my opinion, opening up for us to maybe rethink it a little bit and say, yes, some partners, we will offer the Sleep Cycle core experience to, similar to MyFitnessPal, et cetera. But some other discussions that we're having, I want to explore and see if we can leverage the powered by Sleep Cycle so they could build out their unique experiences where sleep is maybe not the main component in what they offer, but it's a very critical component. So 5 years from now, I think we will still have a solid core product. We will be the leader in sleep. However, I would love for us to see that we have managed to find a partner or a customer for licensing the technology or the data that we generate.

All right. Then there are some questions from Jessica Grunewald from Redeye. And she asks, in your CEO letter, you highlighted the need to adjust pricing and strategies across markets which could temporarily impact subscriber growth but is essential for long-term revenue expansion. Can you elaborate on which markets are affected and the anticipated impact on the growth?

So what we have done during this quarter is that we have a number of markets in different parts of the world where we have actually increased the price. In some markets, it's quite hefty. And what we're trying to do is to create a baseline of what is the right price in what market, but we're also trying to create wiggle room for us to be able to offer discounts during the onboarding of new users or discounts to free user base without hurting our growth too much. So what we're doing now is basically, in a very responsible way, gradually increasing prices as well as we're building out product features that tactically can offer the right price at the right time. We will not do anything that harm our growth in an irresponsible way. But I do want to be clear with that the market in itself, the app market, all customers are very used to receiving tactical offers during either the sign-up or, when they are a free user, to become a premium. If we don't increase the prices, it would be very hard for us over time to have a significant growth if we don't increase the prices. Because otherwise, we will not be able to offer discounts in a sustainable way. So we don't have a set of markets that we will say, "This is the order we will take." I don't think we should be too dramatic about it either, but it will impact the growth in terms of subscribers going forward.

All right. And then there's a question regarding the medical certification of sleep apnea screening, which we are exploring. How can that impact our commercial strategy and revenue? And what changes or regulatory hurdles are you -- are we forced to -- or we foresee to proceed?

I mean, as I said, we will share some more details as we progress. I mean, this is a mid- to long-term effort and we're not nearing launch yet. We are progressing through the, what do you say, necessary regulatory processes, and there is also a very thorough methodology in the steps you need to take. And that can take time. So all I wanted to share today is that given the strength in the technology that we developed during the Q4, we feel the level of confidence to initiate the process of becoming medical graded. And we will, of course, come back with many details as we progress during the next couple of quarters.

And then Jessica has a question regarding competition. Can you elaborate on where we're seeing competition coming from?

I mean, we have our competitors in App Store and in Play Store. Of course, there are a handful of them. And we can see that -- I mean, there is a huge interest for sleep in the society. We see that in the partnership discussions. And I think probably many of you following this company can also see how sleep has gone from something that no one really talked about that is now being positioned in different ways in all kind of conversations. With that said, we see in the last couple of months a decline in App Store in number of downloads, also, and maybe I should say -- even say especially among competitors. Despite this, we have managed to grow, as you can see in this quarter. But the society, as such, is very interested in sleep, and we see that in the partnership discussions. But -- and I know some of you have access to the market data so it shouldn't come as a surprise to many of you. You can see the last couple of months that there has been an overall decline in downloads in App Store that we are mitigating successfully so far.

Then there's a question regarding if we can clarify the quarter-on-quarter decline in ARPU. Is it related to revenue management strategies? And there's also a question regarding what correlations we have observed or expect between churn and price increases.

So it's a two-folded answer. I think one is that ARPU -- of course, when we do rebates, there is a -- we take a hit on ARPU. But we need to remember that the vast majority, I mean, over 80% to 90% of all the new people coming in as paying subscribers are not coming in on campaigns, just so we don't get the feeling here that we're doing a lot of crazy rebates to the majority of the people. That's not true. The absolute majority of everyone starting a Sleep Cycle premium subscription do that at full price. The reason why ARPU is growing but at a lower rate is because also the renewal from previous years is at a lower level. So historically at Sleep Cycle, there has been rebates happening during this quarter. And the way that those rebates has been structured has been that they have renewed at the price where the person came in. The rebates that we're doing now and have done since I joined is that you get a rebate for the first year and then you renew at a higher price. So that is the reason why you see a lower growth in ARPU for Q4.

Now we have a question from Christoffer from Inderes. Are we considering holding Sleep Cycle back from pursuing a more aggressive freemium strategy by expanding the free version's functionalities?

Yes. I think it's something we obviously discuss a lot, Christoffer. There are tests ongoing and has been historic tests. To me, right now, we see that having an aggressive paywall increases the number of net add paying subscribers. But I think there is also a methodology that we will start to explore even further where we, with the help of tactical offers, can convert free users and thereby letting more free users in, having what we in the industry refer to as a smashing paywall, where a user can skip the paywall and then we can try to convert them. So these are exactly the tactics that we're working with, and we have a full team fully dedicated on this. Historically, we haven't worked as much on this. So that's why we need to build up the infrastructure and the capabilities to do so in an efficient manner.

Great. Then there's a question regarding languages and markets. Companies like Spotify have demonstrated how localization, offering services in a user's native language, enhances engagement. Is that anything we're looking into?

I mean, we do it in upper funnel quite aggressively versus we've done before, so in terms of localized performance marketing ads but also localized content for App Store, et cetera. We -- given the size of the company, we also need to be cautious about how many versions we keep track of. But with that said, I also believe now with AI, which we are also leveraging in these matters, could help us to do things that maybe wasn't possible a year ago. We have already tried that in localizing some of the experiences, not least in upper funnel. And we have seen some encouraging results, and we will continue to do so.

Great. Then there's a question regarding that we are more profitable than our financial targets suggest currently. Given this, when do you expect the company's profitability to closer align with the updated at least 25% EBIT margin goal? And I can just clarify that. The EBIT margin goal is on an annual level, and that's what we're aiming for. We want to have some room left for making investments where we see needed to reach our goals in exploring these new initiatives. And then there's a question regarding -- from [ Rasmus ] regarding how we're tracking against our ambitious goal of doubling the revenue in the midterm. Partnerships have been positioned as a key growth driver. Are there specific milestones or inflection points investors should be watching for? And can we share any figures on user acquisition or engagement delivered from the MyFitnessPal partnership?

Yes. I mean, as you point out, [ Rasmus ], we are talking about midterm, so 3 to 4 years. We are confident in the strategy that we have put in place, where already within the first year since the strategy was created, we can deliver a high growth in revenue and also a very satisfying EBIT margin. And then we see the things that we're putting in the market now, some of them I've already shared about what we will do, with tactical offers, et cetera. But we shouldn't also forget that today we shared the news about the medical-grade sleep apnea screening, which we of course believe will help to accelerate the growth as well as the partnership for data monetization and powered by Sleep Cycle. So we see that the things we're putting in the market is working, and we will continue to have a laser sharp focus on delivering the growth that we have communicated in the financial targets.

Then there's a question from [ Erik ]. If we can elaborate a bit on why current conditions are not favorable for buybacks. And I can spend a minute on that. As you know, it's the AGM or the owners that actually decide on a dividend or a buyback policy but it's the Board that recommends. And I know that our Board has carefully looked into this and found that dividends right now are the best solution for Sleep Cycle. I know that they looked into the liquidity. It has been better during 2024. But we still would want to see a little more liquidity so that we can find -- they can find it more favorable. And then there is a question that I'm translating in my head here from Johan at Boström Kapitalförvaltning AB. And he says that we have previously expressed hopes in having a higher growth during Q4. Are there any temporary effects that hindered us? Or was it just harder than we initially hoped for?

I mean, looking back at Q4, I'm pleased with what we have delivered given the market conditions. We have managed to grow a couple of thousand subscribers. We've done that in a responsible way. So of course, we always want to have even higher growth. But looking at the circumstances, I'm very pleased what the team has delivered.

And then there's a question from Ina Djupsund at SEB. What is the outlook for 2025? What should we look forward to in terms of growth, profitability mix? And what are the main milestones you want to achieve?

So during 2025, we would love to see that we continue the growth pace for us to reach our quite ambitious goals in terms of growth while maintaining the EBIT margin above the 25% that the Board of Directors has decided upon and communicated today. For me, some of the milestones and some of the things that I will be looking for is that we continue to close some key partnerships; but also that one of these future bets, the third pillar in the strategy, that we see some of them materialize in one way or another or that we feel that we could say that for some reason, they don't work. So I would love to get more tangible during 2025 in what we mean, either being successful in some of these things that we have started to progress or that we can be transparent about that we don't -- we no longer believe in 1 or 2 of them.

All right. And then there's a question regarding our -- despite our upped dividends, we still sit on a large cash position. Is M&A on the agenda? Or will you focus on organic growth primarily? I would say that we don't -- we're not actively looking for M&A cases but the door is not closed. But -- so that we are focusing on organic growth primarily.

Yes.

Okay. Then there's a question regarding downloads and if it's correlated to Sleep Cycle's ratings in App Store.

Yes. So it's correct. We saw -- we had an incident before the new year where we lost the ratings in App Store. We haven't lost the reviews. We have lost the ratings. We are actively trying to work with Apple to try to get them back. Right now we don't see any major business impact. And as I said before, the segment in itself is losing quite some downloads, and we currently don't.

All right. Then there's a last question. If we can comment on how subscriber churn has developed in the latest quarter. To me, it has been pretty stable. We're working on just decreasing it a bit. We will never have like 5% churn. That's not -- we're not -- don't see that for this business. But it's been stable, no large changes in the churn for the last quarters.

Good. Is that all the questions for today?

That's all the questions for today. Thank you for asking a lot of questions. It's fun to speak to you.

Yes. And thank you so much for continuing to believing in us and wanting to be part of the fantastic journey that we are on. Me and the team are super excited to go into 2025. We have quite some interesting things in the pipeline that we're working hard on to materialize. So we hopefully also can share it in this quorum. Thank you very much. Bye.

Thank you so much.