Dear ladies and gentlemen, welcome to the Sleep Cycle audio cast with teleconference Q2 2022. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. Today, I'm pleased to present CEO Carl Johan Hederoth and CFO Per Andersson. Speakers, please begin.
Thank you, and good morning, everyone, and thanks for joining us today. My name is Carl Johan Hederoth, CEO of Sleep Cycle. Joining me today is Per Andersson, CFO. For today, I will start by providing an update on the second quarter. I will after that walk you through progress on our strategy. Before handing over to Per for financial performance, I will share some findings in our sleep data, and talk about the opportunities that lies therein. Before kicking off, I just want to mention that we have now, as of June, been more than a year as a public company, and I'm happy that we, during the quarters, have been delivering stable results, driven by our investment in product development and marketing, and I'm very much looking forward to the time ahead. Next slide, please. Great.
I want to start by saying it's been yet another good quarter for Sleep Cycle. We're continuing to see good growth in terms of revenue and increasing margins. Subscriber growth is at 8%, and we are at 921,000 subscribers. I've mentioned last quarter, we are now seeing a somewhat lower pace than normal in subs growth, and it's due to a combination of seasonality effects with a somewhat lower intake than normal and price adjustment testing, which we are coming back to in a slide or two. Revenue is at SEK 52 million, growing 19% compared to last year. We are still seeing margins in the high range of almost 25%.
This concludes two quarters in 2022 with good margins, and I'm happy as it shows our ability to scale up the business by accelerating product development, enhancing marketing performance, and all this with sustained and improved margins. Next slide, please. An update on our strategic initiatives. Starting to the left, we're continuing investing in our product. Most notably, we have been busy with our sleep improvement platform. The platform is basically a more comprehensive way for us to deliver different types of content to our users that effectively opens up the separate channels to deliver customer value. It will consist of short, digestible programs developed by our sleep experts, along with our content team, and we will cover a wide range of issues from falling asleep faster, bedroom hygiene, snoring, and so forth.
This will be a highly requested complement to the existing, more data-oriented experience. We will start out with two, three programs, but eventually we'll fill up with more. It will be offered to premium users only, and right now we're conducting a scaled-out A/B testing on this. Secondly, on product, we have during the quarter disclosed findings in how our data science team found strong correlation between coughing frequencies and the spread of Omicron throughout the world. I will talk more about that in the next slide. Finally on product worth noting is Michael Gradisar, a highly cited sleep researcher, clinician, and professor, joined us during the quarter and have been highly engaged in both these two initiatives.
He will help us further to accelerate our investment into science, tech and product, and we are all very, very glad to have him on board. Moving to the middle, we have beefed up the partnership team and made good progress, especially around partnerships with leading corporate wellness platforms. At the same time, we are continuing to see high interest from big tech companies around tech integrations like the partnership that we're running with Samsung. Hopefully, we will discuss this further as we move along. Moving to the right, marketing. As discussed last quarter, we're pacing slightly less on paid acquisition in terms of spend. Post-IDFA is tricky as prices are increasing on several platforms.
At the same time, we are getting more effective, which means that the actual numbers of new subscribers coming from paid channels are more or less in the same ballpark as last year. Regarding paid acquisition and price adjustments, we are on the right track. Higher price points provides room for scale-up marketing, which will be deployed on a market-per-market basis during the last two quarters of 2022. Price testing that we mentioned last quarter has been conducted on a broader scale during May and June with good results. Across different price points, we have seen a gross sales upside on new users with revenue per download growing double digits. This confirms our hypothesis that we are low price in general and that our customers are willing to pay more than $29 per year.
Important to note here is that the higher price point is also driving decreased conversion rates, leading effectively to less new subscribers as it's filtering out users with lower intent. However, the combined effect of higher revenue per installed and thus more headroom for marketing makes us confident to continue the rollout of price adjustments during the rest of the year, even if we, as we've seen in 2019, initially will see a lower subscriber growth. Once marketing offers, in-app discounts, et cetera, have adapted, we will return to higher subs growth again. Next slide, please. A few words around our discoveries around COVID. During the quarter, our data science team has made a deep dive into our data in regards to COVID.
As you're all familiar with, Sleep Cycle was able to, in a highly accurate fashion, detect coughing during the night. While looking at population level patterns, analyzing coughing in hundreds of thousands of users, we discovered striking correlations with official COVID outbreaks. What we learned is that we are able to, in country by country, follow the outbreaks, when they start, when they peak, and when they are declining. Important is that compared to official sources, we can spot these trends roughly 2two to three weeks ahead of a traditional way of measuring. That is because symptoms takes time to evolve, testing takes time, data and data acquisition aggregation takes time. Unlike official sources, we are basically following COVID outbreaks in real time.
To me, I mean, to be able in real time to follow these waves of Omicron outbreaks is amazing. I want to underline that in order for an actor to do this, there are several pieces to the puzzle. You need the population level reach to actually have a lot of data to have significance in your analysis. You need to acquire an audio signal from all these users. From that audio signal, you need to be able to, in an accurate way, being able to detect coughing. To me, I cannot think of many other actors out there, who have these building blocks of performing this kind of analysis other than Sleep Cycle.
It's a truly fascinating discovery, and it really shows off the potential of what Sleep Cycle will be able to accomplish in the longer term. With that, we'll hand over to Per for financial performance.
Yeah. Next slide, please. Thank you, Carl Johan, and good morning, everyone. I will start with a quick summary before I explain the financial development in more detail. First, revenues grew 19% and subscriptions grew 8%. In brief, there are three drivers behind this development. One, seasonality effects impacted downloads and installs. Two, we pursued price tests. As anticipated, they had some impact on number of new subscriptions, but also led to a higher total sales value. Three, ARPU improved very well. Looking at the ARPU isolated on new sales in this quarter, it was well above 300 SEK, which is significantly higher levels than we have seen before. Going into more detail behind this development, the second quarter is normally a slower period due to seasonality effects, that has impacted the number of installs as well as new subscriptions.
Something we have seen impact our peers as well. As anticipated, price adjustments impacted the number of new subscriptions acquired during the quarter. We saw the same impact when adjusted prices in 2018, and we expect it to take some time for the market to adjust to the new prices. On the positive side, we saw significantly higher ARPU from the price adjustments, which meant that the sales value for the quarter outperformed the loss due to lower amount of subscriptions. We also continue to see good renewal rates, and uplift in ARPU coming from subscription mix effects. Carl Johan mentioned before, the price adjustments implemented in Q2 are now being evaluated, and we will start rolling that out in more markets.
With the higher ARPU, we create new opportunities for campaigns, marketing and investments, that we believe will support driving higher growth, during the second part of this year. Just before we move on in the presentation, I just want to underline that when looking at the graph to the left on this side, it appears, our net add was only 1,000 new subscribers during the quarter. It's important to remember that since we have about 50% churn on annual basis, about half the sales each quarter comes from new subscribers. Since we're taking new subscribers on the new price, we immediately see effects of higher ARPU.
Although the change in subscriber base between the quarters looks small, there is a big difference in sales per user that is being accrued over the subscription period. Next page, please. Our profit and loss developed as during the first quarter of this year, and again, we deliver a very strong EBIT margin of 24.4%. Starting with revenues, they grew 19% compared to last year. Except for the subscription growth, ARPU was the main driver coming from both the price adjustments but also from subscription mix effects. ARPU was SEK 228 for the quarter compared to SEK 211 last year. Platform fees developed in line with the revenues, but we continue to slightly improve platform fees share of revenues, which was down one percentage point from previous year.
Other external costs are continuing to be under control. Adjusted for the NRIs in the last year, the difference between the years is mainly related to lower marketing spending and less use of consultants. Staff cost development reflects the growth in number of people that we've seen during the last year. For the Q2 2021, we also recognized NRIs of SEK 2.8 million. That explains some of the difference. We delivered an EBIT margin of 24.4%, which is a result of growing revenues while costs have been under control. In other words, we scaled the business very well. The EBIT was fully reflected in operating cash flow, and we had a bit more than SEK 200 million in cash by end of June.
Next page, please. The story for the first half of 2022 is very similar to the second quarter. We managed to grow revenues through new product launch driving subscription growth in combination with improved renewal rates. In addition to that, we've also seen an uplift in ARPU. As for the second quarter, costs were under control, which resulted in an EBIT margin for the six-month period of around 25%. EBIT was SEK 25.5 million and operating cash flow SEK 38.6 million, which is due to prepayment on the subscriptions. As said before, we keep costs under control, and we constantly improve our operational efficiency. That has led to a very good operating margin since we have been really able to leverage the revenue growth for the first six-month period.
Going forward, we see that we have room for more investments, and we will use that to drive further revenue growth. Next page, please. A few words about the outlook for the rest of the year and our focus areas. We have seen a very stable revenue growth during this first part of the year, but we're not fully satisfied with the growth in the subscription base. With the price adjustments made, we will continue to invest in product development and marketing efforts to increase the revenue growth rate. We believe it will be difficult to reach a 30% revenue growth rate on quarterly basis by end of this year. However, we believe we are very well positioned to meet that goal during 2023. As said before, we have a stable growth.
We have seen good uplift in ARPU, and our profitability has improved during the year. In total, I believe we have a very strong base to build from in order to increase the revenue growth rate, going forward. On profitability, we delivered almost 25% operating margin in the first half year. That margin creates flexibility to scale up investments to drive further growth during the second half of the year. For the full year, we expect an operating margin a bit about 20%. Recruitments have progressed according to plan, and we have a few new colleagues starting up the summer. By end of 2022, we expect to be approximately 50 people, in line with our plan. We continue to see lots of opportunities for potential partnerships and M&A.
On the partnership side, we have several ongoing discussions that should probably be materialized during the last quarter of this year. Further, we have gained some traction after presenting the study on coughing and COVID outbreaks, and we expect to increase investments in this area, for the remaining part of this year. Now over to Carl-Johan to sum up.
Thank you, Per. I want to close by stating that we are yet again delivering stable results. We can sustain healthy margins even with heavy investment in product and with changing market, marketing conditions. We're seeing positive data points from the large-scale price test that we're conducting, and you will see that being rolled out market by market during the rest of the year. This will be followed by an increased growth rate in ARPU, as Per mentioned. We continue to be a profitable and growing business with world-class talent, as we have seen. We are using our rich data and tech in intelligent ways to generate insights that very few actors are able to do.
I want to address that I'm stunned by our teams and very, very enthusiastic about the coming year. With that said, I think it's time to leave over to some questions.
Thank you. To ask a question, you have to press zero and one on your telephone keypad. The first question we've received is from Mark Siöstedt , Redeye. The line is now open. Please go ahead.
All right. Thank you very much. Good morning, Carl-Johan and Per. You mentioned that you were happy with the quality of the subscriber intake last quarter, as many had joined thanks to new product initiatives and thus produced quality cohorts. Has this trend continued into Q2 and the beginning of Q3 as well?
Yeah, for sure. I mean, we can see that the features we deploy continue to drive new conversions, and we're very happy with that development going forward. Last quarter was a more packed quarter with more feature releases than this quarter. This quarter we have been more focused on the price testing and also the content delivery platform that's powering the sleep improvement programs. That has not been rolled out on a large scale yet. So that's the difference between last quarter and this quarter in terms of product release.
Okay. Could you please update us on the pricing optimization? Like, how are these implementations going in different markets? Could you talk a bit about the feedback and reactions? Do you feel some kind of resistance, or is it mainly going according to plan?
I think on a broad level, I mean, we have been trying and testing this on the biggest market that we have. From the data points that we have seen from there is that, of course, it's lowering our conversion a bit, but the combination of a higher ARPU and a higher revenue per install, which is an important KPI when it comes to price testing, we have seen that it's a positive to the overall revenue. I mean, this will differ market by market. I mean, the same pricing logic doesn't apply in U.S. as in Japan. This will be optimized on a market by market level.
Also in a combination with marketing efforts that also differs from, for example, Japan and U.S. This is very market specific.
It appears that most of the implementation so far have been increased prices. Have you looked into lowering prices in large markets such as India, for example?
I mean, that's why we're calling it not a price increase project. This is a price adjustment. For sure, I mean, in some markets, we're for sure highly priced. I mean, the price testing on these markets will show if we will lower or higher the price. We're optimizing towards I mean, revenue and also subscriber growth in these markets. That will differ in India compared to U.S. for sure.
Yeah.
I think in general, we are a bit reluctant to decreasing prices. Instead we prefer to work with subscription length, for instance, or discounts and those types of mechanisms.
Also worth noting is that our biggest market is in U.S., U.K., Australia, and so forth. I mean, these markets have shown very positive results from price increases. The big bulk of markets and the big bulk of our users will have a price increase.
All right. Understood. Your financial position is very strong, especially with your SEK 200 million on the balance sheet. How active are you in the M&A area and how would your, like, dream acquisition look like?
No, I mean, we're active. As we mentioned in quarterly report, the condition have changed a bit since we started engaging in these kind of processes. I mean, acquiring smaller company that has a lot of venture capital and valuations that are very high has drastically changed the last couple of months, which gives us large opportunities for merger and acquisitions. If we're looking at what kind of companies we're looking at, I mean, we're a product company, we're a tech company. We're looking for company that are able to accelerate our strategy, basically, our product strategy.
We're not looking for buying companies that to a large extent diversify our offering or buying users in that kind of way. We're very true to our vision, improving sleep and health in general. That is the main focus.
All right. One last question before I pass on to someone else here. The new platform for sleep training, could you talk a little bit about what you expect from this in the second half and next year, how the rollout is going in the test?
The rollout is going fine, but it's way too early to guide on anything on conversion rates and so forth and subscriber growth. But it's highly requested. As I mentioned, I mean, we're a first touch point to many users when it comes to sleep. Our current experience is great, but it's very data-driven. This is a way for us to get people more engaged and more motivating in actually changing their behavior and improving their sleep. To that end, I mean, we're targeting engagement in this.
We want people to understand why it's important with sleep, because that leads to more active, more engaged user, and that leads to higher trial to conversion rates, that leads to higher renewal rates and so forth. We're not able to guide on anything what we are expecting from this in terms of subscribers or revenue at this point.
Yeah. All right. Makes sense. Thank you very much.
Thank you.
The next question is from Dennis Berggren, Carnegie. The line is now open. Please go ahead.
Good morning, Carl-Johan and Per. Could you start with providing some more detailed comments on the quarter's gross subscription value, sort of at what growth level is total sales value compared to last year? Perhaps if you could add some comments around the trends during the quarter, month by month. Thank you.
As I said previously, during the quarter, we were impacted by some seasonality effects, which we believe is normal at this time of the year. On top of that, obviously, there was some impact from the price adjustment implemented in some markets. Overall, I would say that as I said, we've seen a very good uplift in ARPU, both for these markets in particular where we implement the price change, but also on the blended ARPU.
I would say that for the beginning of the quarter, we saw not a decline, but we saw more impact on the new subscription sales, while we during the last part of the quarter saw an uplift in the new subscription acquisition. In total, I would say that we had sales value that were in line with our long-term target, so to say, in terms of growth compared to last year.
What's important to understand now is that when we say that we evaluate the price test, what we do is that we both evaluate how the conversion rate develops, meaning how subscribers accept these price increases, but also most important, how we can work with other tools to really support the growth. By that, I mean marketing investments, for instance, how we can work with the app and increase conversions. I think with the higher ARPU, we really create more headroom to invest in marketing, new campaigns, discounts and so on. That is what we will really try to implement now, going forward.
I think what we see now, we're with a quite flat subscriber development. Hopefully, that will change now when we can really use all the tools to drive subscription growth going forward.
Perfect. Very clear, Per. The marketing spend was only slightly above Q1 levels despite you seeing positive trends on the efficiency side. Are you satisfied with the current level? If not, why haven't you invested more? Is it due to focus on other parts? How should we think about marketing investments going forward? I mean, you flagged previously that they're supposed to increase, but perhaps if you could add some more color on the magnitude of the expected increases.
Yeah, for sure. Yeah, I mean, we have stable marketing trends right now, and as I mentioned, it's a tricky world out there post-IDFA, the channels and tracking and so forth. But in general, I mean, we want to spend more money on marketing. And that we are addressing this is creating more headroom in the ARPU to be able to actually adding more channels, spending more, reaching different types of users. In general, I think over the last two quarters from the year, you will see a higher investment in marketing.
All right. Perfect. You also I mean, you mentioned the positive aspects of your current cost levels and stable profitability during these uncertain times. How do you think about sort of the resilience on the subscriber side from macro headwinds?
Yeah, I think, I mean, I think we're in a good level right now. Of course, as Per mentioned, as we're seeing, the seasonality effect is somewhat stronger this year, as we have seen among other apps and competitors and colleagues in the business this quarter as well. I don't think we see a weaker consumer at this point. We haven't seen any effects of that as of now. It's important to keep an eye on that. I think the active users we have are using the app, I mean, four, five, six times a week, and it's important part of their daily routine.
I mean, the active subscriber base we have are gaining a lot of value and seeing a lot of value from the experience that we provide. If you're comparing that to having eight or 10 subscribers on streaming platform, for example, I think Sleep Cycle has a good resilience in going forward in this new macro environment.
Yeah. We haven't seen any impact on our renewal rates. Nothing suggests that our users cancel the Sleep Cycle subscription.
Perfect. Just on the renewal rate, I mean, is it pretty much at 60%, as an average, on the entire subscription base or where is it currently at?
Yeah, about that.
All right. Perfect. That was all for me.
Thank you.
That's it.
There are no further questions at this time. I hand back to you.
Yeah. We have actually received one question from Johan Boström by email. Two questions. I start with the first one. Which are the three biggest geographic markets for Sleep Cycle?
Yeah, for sure. I mean, roughly 40% is in the U.S., and the rest is still divided roughly 30%-35% in Europe, with U.K. and Germany being strong markets, and the rest 25%-30% is Asia. Driven by Japan. Australia is becoming a strong market and also China.
The second question is: After a strong margin first half year of 25%, can we still expect the margin about 20% for the second half of the year, or should the margin goal be same for the full year? We have an EBIT margin goal of 20% on the full year, and we've now delivered 25%. What we see now is that we'll try to increase the investment in both marketing as well as in product development. I foresee on a quarterly basis, we will be closer to 20% margin for the two coming quarters. For full year, we expect to be a bit above 20%. Thank you.
Thank you.