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

Hi, everyone, and welcome. Today, we're sharing the Interim Report for quarter 1. My name is Erik Jivmark, I'm the CEO at Sleep Cycle. And with me, I have Elisabeth Hedman, our CFO and Head of Investor Relations. We are Sleep Cycle. We are the world's leading sleep technology company. We have a mission to improve global health by helping people to take control of their sleep. We are used and loved by millions and available in more than 150 markets, in App Stores and as part of many wearables. At the core, our app help people build healthy sleep habits, something that is more needed than ever. What set us apart is that we're not just the world's largest sleep app, we have a proprietary technology platform as well. Everything we do from sleep tracking and smart alarms to audio features like sleep aids, snore detection and sleep talking recording helps users understand and improve their sleep and it's all built on proprietary audio and sleep science technology, engaging and powered by science. There's a lot of uncertainty in the world right now and the macroeconomic pressure is impacting markets across the board. During Q1, we saw a continued downward trend among many of our peers in terms of downloads. This isn't new. We already saw signs of this in Q4 as shared at our year-end call and while we're still growing our subscriber base year-over-year, which shows our relevance and resilience, we are also impacted. The slowdown has also continued into April. Now despite the drop in downloads, which is affecting the entire industry and, as I said, many of our competitors are down much more, there are some bright spots. Our brand has a strong presence and, what I often said before, a true market fit and we see that our conversion rates and annual renewal rates are steady. That tells us that the users who do come in are highly engaged and sticking with us. Also we have to remember even though the sleep segment is down in the App Store right now, the societal interest for sleep has never been greater. That's why we're doubling down on expanding beyond the app. We stand by our financial targets, but it will not be a linear journey. So we've continued to gain market share in a tough quarter. That's a direct result of our focus on what we can control like onboarding and win-back strategies, which are paying off, churn is going down. We see that the release of Sleep Stages in December have improved data reliability, which was a strategic bet for decreasing churn. We're truly focusing on what we can control and the team is doing it well. We're currently growing faster than our competitors and that momentum is fueled by organic loops and a stronger brand presence and we are only down around 10% in new downloads. This is thanks to our true product market fit. We see that some competitors relying heavily on paid media and less on product development are down massively. Our efforts regarding new customers are taking shape with a newly formed team as well as the launch of our refreshed brand. On the partnership side, we have renewed our agreement with Wellhub under much better terms locking in a guaranteed revenue for several years. Our collaboration with Revolut is also progressing well. MyFitnessPal, on the other hand, was something we were clear about that we didn't really know what to expect given the new way of partnering and also the underlying technology. But we can conclude that it has not performed and we're closely evaluating the next steps there. So sleep and its benefits are as relevant as ever. Our basic human needs haven't shifted. People still need quality sleep to function, to focus and to feel well. If anything, the demand is growing. But what we see is that sleep is also being consumed outside of pure sleep apps. This represents both a challenge and an opportunity. It's pushing us to think more broadly about how and where our technology can add value. This is why Powered by Sleep Cycle was born. At the core of everything we do is our AI sound model. It's developed in-house, it's trained on over 3 billion nights of sleep and it's continuously evolving. This technology is what powers the world's #1 sleep app, but it's so much more than that. I mean it generates unique data insights, it enables smart features like full sleep staging and snore detection and it creates real value for users night after night. But we're no longer keeping that power just inside the app. With Powered by Sleep Cycle, we are opening up our technology to the world. That means others can license our SDK and integrate it into their own products and services, whether it's wellness, health care, wearables or even physical products. So whether it's enriching our own app, unlocking new revenue streams through data and integrations or addressing global health challenges; this platform is designed to scale. We currently have multiple discussions underway with potential partners who are interested in exploring these kinds of integrations. These conversations are of course also helping us shaping our offering. However, we're not only looking to use our platform and technology to power others, but also our own future. Sleep apnea is a massive global health issue and still dramatically underdiagnosed. Our technology and also the ability to understand breathing gives us a unique opportunity to address this at scale directly from the phone. We're now starting the process for medical certification. It's a big step forward. It's still early days, but if successful, Sleep Cycle could become the first FDA and CE approved app for large-scale sleep apnea screening. Of course a medical certification will also help us in many of the partnership dialogues and build increased trust in our product also outside sleep apnea. We're confident in our technology and in the value it can bring. The potential market is big and the need is real. Our goal is to kick off the clinical trials in quarter 2, marking the beginning of a long-term opportunity to help millions of people sleep and live better. And with that, I'm handing over to Elisabeth to take us through the financial developments for Q1.

Thank you, Erik. Let's begin with a summary of the quarter's key financial metrics. On the subscription side, we reached 904 (sic) [ 904,000 ] subscriptions, which is up 1.2% year-over-year, but it is a decrease compared to last quarter. The ARPU amounted to SEK 272, representing a slight year-over-year decrease of 1.5% mainly driven by weaker new sales that is also negatively affected by the weaker U.S. dollar and efforts to convert free users to paying subscribers. We have had more customers coming in at a lower ARPU. During the first quarter, we recorded a 2.3% year-over-year increase in net revenue reaching SEK 64.9 million. And the EBIT came in at SEK 17.1 million corresponding to a solid EBIT margin of 26.3%, a reflection of continued cost discipline and operational efficiency. Despite some short-term headwinds, the long-term development has been stable and we're staying on course. The number of paying subscribers decreased with 14,000 during the quarter, but is still 11,000 higher than last year reaching 904,000. While we faced around 10% fewer downloads compared to Q1 last year driven by the tougher market conditions, both our conversion rate and renewal rate remained steady. In a volatile market environment, we're strengthening our position and gaining market share as we see that competitors are hit even harder. This demonstrates the underlying strength of our product and our ability to retain and engage the users over time. Net sales totaled at SEK 64.9 million and the growth rate for the quarter was somewhat impacted by a lower ARPU and a lower sales to new customers, but we are maintaining our long-term growth trajectory and strong margins. Let's move on to profitability. As previously mentioned, we reported EBIT of SEK 17.1 million for the quarter, which corresponds to 26.3% EBIT margin. It's a solid result. The margin is slightly down compared to previous quarters. That's mainly due to higher marketing costs and some additional investments we've made to explore new revenue streams, intentional steps aligned with our long-term strategy. If we look at the adjusted EBIT excluding nonrecurring items, our margin has stayed above 25% for 5 quarters in a row. For this quarter, we did not have any nonrecurring items. Before diving into the P&L for the quarter, I want to take a moment to highlight the impact of currency fluctuations that we have seen more of recently. Around 40% of our revenue is generated in U.S. dollars. When the Swedish krona strengthens against the dollar, it reduces the SEK value of those sales. Since much of our revenue is recognized over a 12-month period, the figures for this quarter reflect sales and exchange rates over the past year. If the current FX trends and softer market conditions persist, they may continue to affect revenue development going forward. We're also affected by FX in another way. Although the majority of our sales is made in foreign currencies, the payments we receive from platforms like Apple are settled in Swedish krona. There's a delay of up to 2 months between the time of sales and the time of payment and if exchange rates shift during that period, it impacts the value of our transactions when it's recorded and in turn our profit. We did, however, record a net revenue growth of 2.3% or 1.6% currency adjusted. And the net revenue growth was driven by a higher number of paying subscribers compared to previous year and successful partnerships although ARPU declined slightly due to a lower intake of new customers as well as our strategic freemium and win-back campaigns. On the cost side, we had slightly lower distribution costs thanks to a more favorable mix between new and renewed subscriptions. And the other external costs increased by 19.7% somewhat due to higher marketing spend in line with our plan to support future growth. Note that last year's figure included NRIs of SEK 800,000. The staff costs were lower compared to Q1 last year, but that's explained by nonrecurring items in Q1 2024 of SEK 5 million related to the reorganization and consolidation of offices. And the average number of employees were 33 during Q1 this year compared to 37 last year. Depreciation and amortization also decreased mainly since the previous year's figure included the lease for 2 offices, 1 in Gothenburg and 1 in Stockholm. Now we only have 1. The other operating expenses include negative FX effects of SEK 1.3 million related to the time gap between point of sales and point of payment from Apple. Normally these impacts are fairly limited; but due to the recent volatility in the U.S. dollars and other currencies, the effect was more pronounced this quarter. The EBIT margin of 26.3% is in line with our long-term target of at least 25% annually. Finally, our liquidity remains strong at SEK 157 million at the end of the quarter. Now over to you, Erik, to wrap it up.

Thanks, Elisabeth. So our new strategy was designed with this in mind and we stand firm by our financial targets. We're focusing on upper funnel, we're bringing product improvements to the app and we see the results with decreasing churn and also new possibilities. We are taking market shares and we're also accelerating our future bets, opening up our technology to the world with Powered by Sleep Cycle. I'm really looking forward to see how the new bets will materialize, capturing the general interest around sleep and the growth beyond our current market reach. Thank you for your continued trust and support. And with that, we are happy to take the questions you might have.

All right. First, we have a question regarding what the main focus for management is to achieve the financial targets, to increase the revenue since subscribers have been flat for the last years. Do you want to elaborate on that one, Erik?

Yes. So the strategy speaks about a couple of things. One is the upper funnel and in this quarter we have invested in a dedicated team working more diligently with the upper funnel activities. And I think that is part of the reason why we are also seeing that we can take market shares in the current market. The other thing is obviously that we are continuing to investing in the product. We are a product company and we see that when we make the right investments such as sleep staging and allowing us to be able to track breathing, it also helps our renewal rate mitigating churn. The third thing, which is one of the bigger things that we talked about today, is the fact that we are opening up our technology platform. So what has made us the most successful sleep app in the world, that underlying proprietary technology is now something that we are opening up to partners to be able to leverage and to either integrate in their current experiences or to build on top. I mean we are an authority within sleep science, but also sleep technology. So we're starting the discussions with some very well-known brands across relevant segments, but also devices and we have high hopes on that. All of this we believe will help us to generate the growth that we have set out in the financial targets.

Then there's a question regarding if we can elaborate on the item capitalized work for own account in the P&L and why it differs from the line in the cash flow statement? What we have in the P&L is the work from our own staff so it's SEK 400,000 capitalized from our own staff. The difference between that one and the one in the figure, SEK 3.8 million in the cash flow statement is external costs. Currently, we have 3 projects that we are capitalizing on. One is obviously sleep apnea, that is the main project. We have also launched a new web that will improve the web-to-app process and hopefully leading to more customers joining us from the web instead of through the App Stores. Also we're working on a cofreighter site that will show and visualize our data that we possess.

What would be a realistic timeline for the sleep apnea certification? Well, as you know, getting a medical approval is going through some different steps. So for us, this is a mid- to long-term effort and we are currently progressing through all the regulatory process. We have had meetings with some regulatory bodies and it's on the back of those meetings that we have decided to start our clinical trial now in the second quarter. So after that, we will -- after we see the outcome of the clinical trial, that's when we will decide to go for the formal application or not.

Yes. And then we have a question also regarding the sleep apnea project, what the costs will be per quarter? And as I previously mentioned, we have capitalized this as we see it as quite an investment for us. The amount that will be invested will differ from quarter-to-quarter. We will be working on this the full year and somewhat into next year as well.

We also got a question on the marketing. You previously said you're waiting to finding traction before starting increasing in marketing. Why did you start to increase in marketing? We see traction in marketing. That's why we have started to increase the spend. So we're always keeping a close eye on cost per install, cost per trial, but also the CAC LTV. So as soon as we see that, that's when we started to invest. I think we're still investing moderately. You mentioned in the CEO letter that the Sleep Health segment has seen a decline in the App Store. Could you elaborate on your thoughts on the key drivers in this trend? Well, I think first of all, we have to remember that health is a super popular and growing category. I mean it's very clear that people are willing to invest in their well-being. What part of health we're willing to invest in shift over time and we see right now, which we believe is temporary and probably also connected to some of the uncertainty in the world, that our peers and our segment is slightly down. But it also make us aware that we need to be able to keep more than one thing in our head at the same time. We can focus on our app business, which we have done during the quarter. We have taken market shares. But we also need to diversify and broadening our offers with Powered by Sleep Cycle, selling the technology, but also building new products on top of our technology such as sleep apnea. So sleep as a topic, it's growing and we need to think about it more broadly.

Then we have another question regarding FX. How we should think about that going forward, particularly in the light of the recent SEK strength and how balanced is our FX profile in terms of revenues and costs? The majority of our costs are in Swedish krona and, as I said, we get our payments in Swedish kronas as well. So the FX translation is made on the partnership side. Obviously we are looking at what we can do to make the effects smaller.

We have a question around 80% of new users comes from recommendation. Does it include recommendation from App Stores? Yes. I mean, 80% of our new users are organic and that could come through word of mouth, but also the fact that we are organically surfaced by App Stores. So it's both. Any other questions? Any measurable effects in customer acquisition/retention of the new branding launched in March? So we haven't rolled it out to current users yet so it's too early to say. We have obviously done tests on the current user base. We launched it during the later part of March for new users and we rolled it out gradually. We see some promising sign in terms of onboarding and conversion rates. But since we went live fairly late in March, it's too early to draw any significant conclusions.

All right. We have a question regarding how we work with the excess of cash, if we focus on receiving a good interest rate from the bank? Yes, obviously we do have a large cash at our hand and we work with banks to make sure that we get the best interest we can given our strategy for it. There's also a question regarding buybacks and why it's not used as a tool? This is something that is a question for the Board and the AGM, of course. I know it has been looked into and due to the lower liquidity in the share as well as the way the cap table looks, it was deemed to be a better solution to give a higher dividend this year at least.

We have a question about the eNPS. So my view is that people at Sleep Cycle are quite happy to be here. We have to remember that we have done quite significant changes during the last year and of course being a small team, that impacts the feelings that people have. But I feel we're in a good place as a team and we are aligned on the things we are achieving going forward. We got a question on the medical certification for sleep apnea screening. How do you expect this to influence your commercial strategy and revenue model? I think it's too early to say. We will come back on the revenue assumptions that we've made. Obviously, we have a strong business case in the background. That's the reason why we're investing in this. At the same time, we will conduct some tests in parallel. So we're doing that already now with users where we do take floor tests, et cetera, to see click-through rates and so forth. But we don't expect any sales or revenue connected to sleep apnea in 2025. Could you comment on subscriber retention and churn during the quarter? Yes. Both subscriber retention or churn developed positively during the quarter and again I think that speaks about the fact that the product we have is loved. The challenge is that right now the last couple of months, it has been fewer people in the upper funnel. So that is the reason why we saw a bit of a decline in Q1. But again, our product stands strong compared to the competitors and we are also, of course, converting a lot of new people. But there are fewer people in the funnel right now and that's what we're actively working with to ensure that we convert as many of them as possible and also broadening our reach through the partnership strategies, et cetera. When you now found traction in marketing, when do you expect to return to growth? Is it necessary for the market to turn before you can grow again? No, I don't think we need the market to turn. I think we're in charge of our own destiny. I think again we've proven that during the quarter, we've been growing or taking market shares quite significantly. So I don't see that as being the problem. Good. So thank you very much, everyone, for the questions and for listening in. As I said, we have an exciting quarter ahead of us. We are putting a lot of new things in the market both short term to make sure that we continue to take the market shares and that we can continue to grow. But also, we're putting in quite some substantial efforts in the medium- to long-term bets that we have. And I'm really excited to see how these will start to materialize during the next couple of months. Thank you, everyone. Bye-bye.

Thank you so much. Bye.