Storytel AB (publ) (STORYB) Earnings Call Transcript & Summary

Welcome to Storytel Q3 Report 2024 [Operator Instructions] Now, I will hand the conference over to the CEO, Bodil Ericsson Torp; and CFO, Peter Messner. Please go ahead.

Hi, and good morning, everyone, and welcome to Storytel Group's earnings call for the third quarter of 2024. I am Bodil Ericsson Torp, and I've been here as the CEO of Storytel Group since October 1. Joining me today is Peter Messner, our CFO. I'm really glad to be here today. I've been working at Storytel now for 4 weeks, and it has been really exciting. I've spent my time on meeting our brilliant team and getting to know our business. And I will say that, I'm really eager to get an even deeper understanding, especially when it comes to our customers and users in the different markets as well as our products. I have spent over 25 years in the media industry, working with media groups like Bonnier and Aller. And mainly during all those years, I have been focused on driving growth for strong consumer brands, with an emphasis on subscription-based models, combining content with excellent tech. And this is actually where I have my big passion. So someone called me a subscriber hunter, and that's actually spot on. So one of my big goal here is to capture everyone entering our amazing Storytel world and never ever let them go. Sales and marketing are also in my DNA. So I'm really excited to continue our success, to deliver even greater value to our customers and all our stakeholders. Thanks to the hard work done by our team here, the Group has delivered the best quarterly financial performance ever with record-high revenues of SEK 954 million, with an adjusted EBITDA margin of 18.7%. We are so proud to present these results. And with that, I will hand over to Peter to talk about the details of our quarter performance. So let's move on, Peter.

Thank you very much, Bodil, and welcome to the third quarter earnings call also from my end. Let's start with some operational highlights. Foremost, the profitability improvements we continuously see and report are the result of the disciplined strategy execution balancing growth and profitability. During this third quarter, our paying subscriber base grew by 10% to above 2.3 million paying subscribers, and 40% of that growth was driven by our core Nordic markets. The size and therefore, the growth of our subscriber base is, however, not the only focus. It's also the health of the subscriber base, and that is evidenced by the paid churn development, which continues to be on an all-time low. From a content cost perspective, the increased consumption of our own high-quality content from internal publishers again contributed to the improvements on gross margin level. Following the introduction of new pricing plans, and differentiated promotions in the Nordics in the second quarter, I'd like to particularly highlight our Finnish market, where we saw an outstanding success with our Premium for Life campaign, which also heavily contributed to the low churn. In total, we saw our subscriber base in Finland growing by 30% year-on-year during this quarter. Our publishing houses continued to release bestseller lists and consumption topping titles during the quarter, including another Storytel original from the Red Revenge series of Danish Author Nis Jakob and Emelie Schepp's thriller 100 Days in July published by Norstedts in Sweden, to name just 2 of the highlights during this quarter. In September, Swedish crime author Sammy Jeridi signed a multi-book deal with Norstedts and Storytel, showcasing again the dynamic synergies between our streaming platform and the publishing houses within the Group. Let's turn to the financial highlights then. As Bodil mentioned earlier, Storytel Group again delivered the strongest ever financial results during this quarter. Group net sales increased by 7% or 8% at constant exchange rates to SEK 954 million. The adjusted gross profit margin improved by 4.6 percentage points year-on-year to 45.7%. Our EBITDA performance was particularly strong with adjusted EBITDA reaching SEK 178 million, which is up 76% year-on-year. The record high margin of 18.7% during the third quarter also reflects positive seasonality effects in the personnel cost base due to reversals of vacation accruals as it is the main vacation period during the year. Else, however, the significant year-over-year improvement is driven by the increase in revenues and gross profit and also by the cost efficiency measures that the Group has been taking since last year. All these operational and financial improvements are reflected in our operational cash flow, which was SEK 146 million and in our adjusted operating profit, which improved to SEK 105 million, which is a margin of 11%. Let us turn to our segment performance then. Looking first at the operational performance in streaming, which is our largest segment, we are again pleased with the very strong results. The total subscriber base grew by 10% year-on-year or 222,000 subscribers, up to an average number of subscribers of 2.36 million during the third quarter. More than 40% of that subscriber growth came from the Nordic markets, which contributed with an 8% growth, while the non-Nordics core region grew 16% year-on-year and contributed 129,000 new subscribers year-on-year. The ARPU, the average revenue per user remained at a high level and organically decreased by 2% year-on-year or 4.4% when including the adverse currency exchange effects, as a result of the expected stronger subscriber intake in our lower-priced tiers. As mentioned earlier, we focus not only on the size, but also on the health and therefore, the profitability of the subscriber base, which means all time a balancing of subscriber growth and ARPU. We manage this through the ratio of customer lifetime value to our subscriber acquisition costs, and our success is evidenced by the development of paid churn, which continuously is at an all-time low. When taking a closer look at the Streaming segment's financials then, we see that total net sales were up to SEK 852 million, which is a 5% increase year-on-year or 8% at constant exchange rates. Revenue in the Nordics region increased by 3% based on a subscriber increase of 8% and an ARPU decrease of 5%, which is also impacted by adverse currency effects. Revenue in the non-Nordics core region increased by 16% based on a subscriber increase of 16% and a slight ARPU decrease a little bit below 1%. Adjusted gross profit for the Streaming segment increased by 11% to SEK 354 million, with a margin of 41.6%, which is 2 percentage points higher than in the third quarter last year. The total operational expenses significantly decreased such as the general and administrative expenses, which decreased by 59%, again, including a positive seasonality effect on personnel expenses due to the reversal of vacation accruals during the summer. As a result, the adjusted EBITDA contribution from the streaming segment increased by 56% to SEK 121 million, and reflects a margin of 14.2%. And the adjusted operating profit contribution from the Streaming segment increased by 142% to SEK 90 million. Let's then turn to the Publishing segment. The Publishing segment reflects the financials of all the publishing houses within the Storytel Group. This is Norstedts Publishing Group, Lind & Company, Gummerus, and Peoples, as well as our global digital audio publisher Storyside. The total net sales in the Publishing segment increased by 13% to SEK 285 million, out of which the external sales, which account for 54% of total sales, increased by 11% to SEK 154 million, and the Group internal sales increased by 15% to SEK 131 million. As you can see in the bottom left chart on this slide, the internal sales show a more stable and increasing development, while the increase in the external sales over time is subject to certain seasonality patterns also defined by the print sales. Adjusted gross profit increased by 52% to SEK 98 million, with a margin of 34.5%, which is 8.8 percentage points higher than in the third quarter last year. Adjusted EBITDA contribution from the Publishing segment was up 48% to SEK 87 million and reflects a margin of 30.5%. And the adjusted operating profit contribution from the Publishing segment was SEK 47 million and increased by 141% year-on-year. Both the gross profit and the EBITDA margins follow certain seasonality patterns due to different gross profit margins in print sales versus digital sales, and also effects from inventory write-downs. Overall, the increase in margins is not only the result of higher revenues, but in particular, also due to the many operational improvements that have been implemented since last year. Let's take a look then at the Group's cash flow statement, which shows really the results of the disciplined strategy execution and the past cost efficiency measures now. The cash flow from operating activities before changes in working capital increased by 88% to SEK 148 million, where the change in working capital was SEK 45 million, and explained by the seasonality on accrued expenses, including royalty payments. The cash flow from investing activities reflects our investments into content, product and technology and was minus SEK 44 million, and the cash flow from financing activities was minus SEK 9 million. All in all, total Group cash flow for the period was a positive SEK 140 million. With that record-high cash flow generation, let's have a brief look at the Group's balance sheet. There are overall no major movements on very much all of the asset lines in the balance sheet with total assets at roughly SEK 3 billion, and reflecting an equity-to-asset ratio of 43.9%. Cash and cash equivalents at the end of the period was at SEK 448 million. The only remaining financial debt is a revolving credit facility. Only after the end of the period, we have extended the maturity of this revolving credit facility until April 2026, for which the related liabilities were still classified as current in the balance sheet as at the end of September. The new revolving credit facility is SEK 700 million, of which SEK 650 million are currently utilized. How does this debt then translate into the Group's leverage? Well, firstly, our operational cash flow, defined as EBITDA, excluding any items affecting comparability, less any operational capital expenditures was on a record-high level with SEK 146 million or 15.3% of revenues. The net interest-bearing debt was SEK 202 million at the end of the period and represents a leverage ratio to the last 12 months of adjusted EBITDA of 0.4. As you can see, the Storytel Group has significantly deleveraged during the past 12 months, down from a leverage ratio of 1.3 at the end of September last year. Finally, so where do we stand regarding our financial guidance for this year based on this strong performance. As a recap, our previous strategic shift towards an increased focus on efficiencies and profitable growth, which was initiated in 2022 and reinforced this year has led to significantly higher profitability, while still maintaining solid growth. With the continued strong competition, particularly in our core Nordic markets, we have applied a fairly disciplined approach to marketing spends. And therefore, we have chosen to revise our 2024 full year revenue growth guidance to around 8%. At the same time, we now expect to be close or reach the previously outlined 2026 midterm targets of both adjusted EBITDA margin above 15% and operational cash flow above 10% of revenues already this year, which is more than 2 years ahead of plan.

Thanks, Peter. This performance is a clear statement of the Group's strong financial position. And I will say, it also open up for many strategic opportunities. I will work closely with our team to review our business plans and evaluate the different possibilities that we foresee. And with that, we conclude this presentation and open up for your questions.

[Operator Instructions] The next question comes from Derek Laliberte from ABG Sundal Collier.

And also great to have you on the call, Bodil. I wondered if you could start out by maybe sharing some of your -- I know it's early, but some of your key observations perhaps after being on the inside, so to speak, for about a month now?

Yes. As I said, I'm really happy to be here, and I've been here for 4 weeks now. So of course, I'm deeply impressed about the work that has been done by the team here. All the strategy executions by combining a disciplined strategy for marketing investments and also the cost efficiency, but also securing the market positions within the different markets that we are in a leading position as well as we are a challenger. That's really impressing work that has been done. And so far, I would say, even though it's really early time, I'm really impressed by the highly skilled team that we have here within the company regardless of the different disciplines that goes into tech, product, marketing, publishing and also finance to mention some of the skills. So the company is in a really good position now. And of course, my responsibility is to take it to the next level. But even though, it's quite early stage.

Got it. Sounds good. And if we could move to the Nordic streaming here, it's very, very solid intake subscribers here during the summer. You mentioned there's really strong 30% growth in Finland, at such. But I wonder, if you could break it down a little bit and explain what you -- how the sort of individual Nordic markets performed here?

Yes. Derek, welcome to our call. I mean, as you know, we are not breaking out the single countries, but it was worth to really highlight and mention the success in Finland because you need to put that a little bit into the perspective of our expectations for this year and the overall intake, and the balancing really between the profitability of the customer base, the health and at the same time, the growth outlook in the Nordics as well. What we have been doing in -- starting in Q2, really, as I mentioned, on the operational highlights with the new pricing plans and in particularly the For Life campaigns, they are really a very important item in building up a subscriber base that has continuously a very low churn. You can understand that a For Life proposition for a consumer is very powerful, right? It comes at a certain short-term cost for us as an operator, because we obviously give a For Life at 50% discount. But it comes with a commitment of a consumer to really stay hopefully for the long-term. And we have seen -- it's still early on, but we have seen these positive developments in the continuously low churn. In fact, it's the lowest churn that we continuously have in our business. So the combination of exactly these pricing innovations, with a very strong consumer proposition and the very low churn is exactly that balancing act between, how much do you want to push subscriber growth in the short-term at a higher ARPU, or how sustainable and long-term thinking with maybe a short-term impact on that growth you have. But Finland has shown, and we are the #2 in Finland, as you know, Finland has shown that we gained market share with a 30% increase on subscriber growth, that was a clear sentiment that these pricing innovations and the campaigns that we have been running a Student for Life campaign and also a time limited Premium for Life campaign have really been successful. So we look very forward to and that overall supported, not only but to a large extent, the very strong intake of subscribers in Nordics during this quarter.

Okay. And on that part, with the different pricing and subscription packages here, how did this -- has this flex time limited subscription performed? And are you seeing, for example, younger audiences coming in here because of the lower price point and the overall characteristics of that subscription?

I mean, that has been one of the reasons, obviously, to introduce the pricing and the way how we package that product. If you think back a few years and where we really come from in a time up until 2022, where we essentially had in the Nordics and overall an unlimited plan only, we went -- or the Group went really into very differentiated pricing tiers. And one reason for that is not only the competitive part, but it's, of course, also the segmentation of our consumers and really to respond to the various different [Technical Difficulty]

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The next question comes from Joachim Gunell from DNB Markets.

We seem to have lost the connection to the speaker. We'll back shortly. [Technical Difficulty]

The next question comes from Derek Laliberte from ABG Sundal Collier.

Yes. Hello? Can you hear me now?

Hi Derek, yes, something technically must have happened here with the provider. So I'm not sure how long you could really follow, but just let me know what kind of answer part you still got. And otherwise, I will simply repeat.

No, I think we're good on the subscription packages. I was wondering if we could jump into -- I know, you're not commenting too deeply on the individual markets, so to speak. But looking at the non-Nordics core Streaming segment here, I mean, I would have expected somewhat higher subscriber intake than what we've had here in Q2 and Q3. So I'm wondering sort of it's still good growth, but what's really going on there and is something holding this back? Or is it the price increases you rolled out, for example?

Yes, exactly. So let me start with the final item that you mentioned. If you take a look at the ARPU development in the non-Nordics core, you see a sequential improvement on the ARPU, which is the result of the price increases, in particular in the Netherlands and in Poland. So that had an impact. And when you do price increases without adding other services or features, then of course, this is always a balancing game where testing a little bit the ground how much of a price increase can you do without impacting the short-term churn profile and therefore, the intake, right? So there is an effect, obviously, on the subscriber base. What we, however, also did during the third quarter, and we just launched this something like 2 weeks ago in the Netherlands is we introduced new pricing tiers. The Netherlands and some of our outside of the core Nordic markets are not yet changed to our pricing tiers that we have here in the Nordics, which is a basic or a flex, a premium and unlimited and family plans. So we have introduced this in the Netherlands as well and planned for that introduction. And therefore, it made sense to balance the various efforts and the promotions and the campaigns accordingly. So the intake was stronger towards the end of the quarter, but the quarter averages, if you compare them to the second quarter averages are impacted, so to say, by that. But it's a combination of the price increases that nevertheless increased the ARPU. The ARPU overall in non-Nordics core declined by a little bit, but that is also impacted by the currency exchange effects. Overall, the year-over-year increase in ARPU was a positive almost 2.5%. So there's a very positive ARPU development. Subscriber intake exactly, as you say, a little bit slower, but intentionally because we have been balancing exactly these 2 items. But I would expect that to change now given what I just said, what we introduced in the Netherlands and what we continuously focus on in some of the other markets.

That's great clarity. And on -- can you say something in general on the pricing here? It seems overall, I mean, you have temporarily higher churn or slower intake, but price increases have been received pretty well, I would say, over the last couple of years here. So what's the plan here? Will you raise prices further?

I need to be very careful with an answer, which you hopefully understand based on the sensitivity also towards our competitors. But as you said, the price increases that we did in the Nordics in the beginning of 2023 have been very well received. What happens, as you can understand, is that the composition of the consumer base in the various pricing tiers changes over time when you have new intakes that may preferably join lower-priced tiers than you had before, which is, of course, also reflected in the ARPU development in the Nordics over time. With price increases being now passed, if we enter the next year 2 years ago, there may be an opportunity, but I think it would be too early for us to really commit to anything. But pricing and overall packaging is always something strategically that you need to take a look at into your marketing mix, right? So it is something that every provider in that space has to take a look at.

Okay. Okay. Perfect. And then finally for me, now with the strong cash flows here and the balance sheet as well as you mentioned when it comes to M&A, is this something you're actively pursuing now? And if so, what type of targets are you primarily considering?

I mean, exactly, as you said, if we wouldn't do now any investments with the likely net cash position that we would achieve at one point in 2025, as Bodil mentioned earlier, this opens up for many different strategic opportunities. And M&A is one of those opportunities in the toolbox that we would look at. We always have open ears and open eyes to see are there interesting targets? Is there something that really fits in there? At the same time, this is the time of the year, not only for budgeting, but also for strategy revision. Since May, we have new Board members and new Chair. Bodil just entered 4 weeks ago. So we take a look -- a very close look at our strategic plans and our business plans, and we will update the market, if there is anything to update about. But the general answer is, of course, we will always take a look at, especially because we are now in such a strong financial position to be able to really take a look at that.

The next question comes from Fiona Orford-Williams from Edison Group.

I'm quite new to this story. So if the other analysts will forgive me, if I go to something a little bit more basic. You're talking about a range of tiers. Can you just tell me a little bit more about how they vary? Is it by content? Is it by access? And then the objective of having those tiers, are you trying to attempt people in at the lowest prices and then manage them up through the tiers to become more profitable for you?