Hello, and welcome to Sleep Cycle's Q3 report 2022. Throughout the call, all participants will be on listen-only mode, and afterwards, there'll be an opportunity to ask questions. If you have any questions, please press zero one on your telephone keypad. Today, I am pleased to present CEO Carl Johan Hederoth and CFO Per Andersson. Please go ahead.
Good morning, everyone, and thanks for joining us today. My name is Carl Johan Hederoth, CEO of Sleep Cycle, and joining me here today is Per Andersson, CFO. For today, I will start by providing an update on our third quarter. I will then walk you through the progress on our strategy. Before handing over to Per for financial performance, I will put some color on the partnership with Gympass that we launched during the quarter.
Before we get going, I wanted to begin by commenting on current trends in our sector that we see in respect to the macro environment. Zooming out, there are, as you all know, some level of uncertainty on the market going forward. Firstly, according to a recent report from Sensor Tower, the global consumer spend and downloads across both Apple App Store and Google Play was declining for the first time in Q3. This, of course, is an effect of the growth we've seen at both app stores from inception, and especially since COVID outbreak in early 2020, peaking in 2021.
Secondly, we have seen general increased costs for marketing in our sector during the first half of the year. In some areas we have seen almost double cost per install compared to last year. Looking at peers at the moment, ranging from sleep trackers to relaxation and mindfulness apps, we see growth companies fueled by primarily paid marketing is slowing down significantly, as cost has been rising, and valuation and easy funding declining during the year.
As a contrast, at Sleep Cycle, our high share of organic installs and thus very low blended subscriber acquisition costs that in the end makes us a highly profitable business, puts us, compared to many other peers in the space, very well-positioned going forward. Yes, we have seen less than normal install rates during the slow summer months, that in combination with our price adjustments are affecting our subscriber growth. But at the same time, we have not yet observed any effect in our subscriber base, nor in higher degree on cancellation or retention.
Rather the opposite, as renewal rates continues to be stable, and even increasing compared to last year. At our scale of paid marketing, we're still performing very well, and the LTV/CAC ratio trends in the right direction in all our major channels. I would not be surprised if marketing costs in our sector will be coming down the coming quarters, and that in combination with our margins and financial strength, makes us very well-positioned in the market for the coming quarters.
Next slide, please. Great. I wanted to start by saying that it's been yet another good quarter for Sleep Cycle, as we continue to see good revenue growth and even increasing margins. Subscriber growth is at 3%, and we are at 912 subscribers. We are in Q3 seeing a slower year-over-year subscription growth, and that is mainly due to a slower organic intake than normal during the summer months. We are seeing this picking up lately back to normal levels.
Also secondly, price adjustment testing on several markets affecting conversion rates. With these two in combination, I believe that overall we are doing good, and I'm confident that subscriber growth will be returning to higher growth levels in the coming quarters. Revenue is at SEK 55 million, we're growing 21% compared to last year, excluding the one-time engineering fee to Samsung. We're still seeing growing margins at 25%.
Next slide, please. Update on our strategic initiatives. Starting to the left, we continue investing our product. Even though we usually have a slower product release pace in Q3 due to summer vacations, we are rolling out over 30 new courses and programs to our premium users. They are developed by our sleep experts and covers a wide range of topics from falling asleep faster, bedroom hygiene, snoring, and then so forth.
Secondly, to the left on product, as you know, Sleep Cycle is a freemium product offering a generous free usage tier, and free users constitutes a large part of our daily active users. Even though we will never serve ads to our users, we believe there are opportunities in this segment, and we're now conducting market-specific testing in order to further monetize our high free user inflow.
In the middle, we announced a partnership with Gympass, the world's largest corporate well-being platform, where Sleep Cycle is being offered as the only partner within the sleep area. I will dive deeper into this in the next slide.
To the right, moving to marketing. During the first two quarters, we have been pacing slightly slower on marketing spend. In Q3, we are ramping up this as we're seeing increased opportunities to add additional channels to our marketing mix. This is the result of increased LTV due to price adjustments that makes room for higher subscriber acquisition costs.
Next slide, please. Gympass. Right. Wanted to give you some more color on the partnership with Gympass. Gympass is the leading corporate wellness platform with more than 1 million employees connected worldwide. Through employers, they offer unlimited access to a variety of different fitness programs, including gyms, classes, and also digital services. With this partnership, Sleep Cycle is taking a position on the platform as the only digital service for sleep next to other health apps such as Calm for mindfulness and Strava for exercise.
We are excited about this partnership since this gives us access to high intent users with an interest for wellbeing and health. We're also leveraging Gympass footprint in markets where we currently have lower penetration. The launch on the partnerships has been successful, and we activated more than 7,000 users through this platform. With that, I will move over to Per for financial performance.
Thank you, Carl Johan. Next page, please. In the third quarter, we continued to deliver very stable revenue growth. Revenues were up 12.8%, which was 7.3% adjusted for FX. Last year, we received compensation for engineering work from our partnership with Samsung. When only looking at subscription revenues, we actually grew 20.9% in Q3. Coming back to what Carl Johan explained about the current market climate, I believe we do it very well, and it is an achievement to deliver +20% growth in this quarter.
Looking at the subscription development, the number of paying users grew 3% compared to last year. As you see on the graph on the left, we had a small decline from Q2, and that is not something we are satisfied with. There are two things I want to say about that. We have been facing headwinds from declining installs, and we also see some negative impact from the price adjustments we did earlier this year.
We've seen similar development for our peers, and in relative terms, I believe we are managing quite well despite the declining installs. On the positive side, we've seen indications on Apple Watch being installed lately, and hopefully we are now entering the period which we normally see user acquisition.
Next page, please. Looking into the P&L for the third quarter, we again delivered an EBIT margin of almost 25%. Revenues grew 12.8%, which to some extent was driven by FX, in particular the US dollar. As I said on the previous page, we had a lower new user intake, but managed to compensate that by high renewal rates and uplifting ARPU, which is reflected in the revenue growth. ARPU increased from 209 to 239 SEK, which is up 14%.
Going down the P&L, a little less expenses were capitalized than previous year. That is to some extent the result of the mix of the development project. Platform fees continued to develop positively and decreased relatively against revenues. Adjusted for non-recurring items in Q3 last year, OPEX was in line with previous year. During the last part of this quarter, we increased marketing spending, reaching about SEK 3 million-SEK 4 million per month, which is the level we continue to spend on now.
In total, marketing spending was SEK 10.2 million in this quarter. Staff costs increased in line with the growth of the organization, and depreciation and amortization increased due to capitalized development projects. Again, we managed to deliver an EBIT margin of almost 25%, which is well above our 20% target. We do that through good cost control and stable revenue growth.
Cash flow was on the same level as last year. The reason why cash flow didn't increase was mainly because we had a tax cost of about SEK 3 million in this quarter. Last year, tax cost was considerably lower due to the high amount of NRIs we had in that year. By the end of the quarter, we had SEK 223 million cash. In addition to cash flow from operations, we also had a warrant program that expired during the period, which contributed SEK 16.6 million when warrants were converted to shares.
Next page, please. For the nine-month period, we have grown revenue 16.8%, which was 14.4% FX adjusted. The cost base developed similarly as the first half of this year. In general, we have kept costs under good control and intentionally decreased marketing spending during the first part of this year. In total, that has led to growth in EBIT of 38%. I think that shows the strength in this business.
Although the revenue growth rate is not on the levels that we expect, we have a fairly flexible cost base, and we are able to deliver very strong profitability in challenging market climate. Another positive aspect of our business model, which is shown in the nine-month period, is obviously cash flow. Operational cash flow was above 50 million SEK, which again underlines the advantages of our business model.
Next page. A few words about the outlook and focus area. Growth remains our number one priority. Although we have been facing headwinds with the negative download trend, we have a lot of product releases planned in the coming months. We also started to invest more in marketing during Q3, and we believe we will soon be back on positive subscription growth quarter by quarter. We will continue to implement price adjustments as started earlier this year, which will have positive effect on sales and revenue.
Profitability has been very stable. As I said before, we are well above our 20% EBIT target. We will ramp up both marketing investments and product investments in order to increase the growth rate. I expect the EBIT margin to be about 22%-23% for the full year. On staff, we will increase investments in product development, which means hiring more people. Within the coming 6-month period, we expect about 5 new hires.
Last, other opportunities. We launched a partnership with corporate wellness provider Gympass during the third quarter. We believe there are more opportunities on these types of platforms, which is a very good way of reaching new users. Further, as we also said in the Q2 presentation, we are continuously evaluating M&A opportunities. We now have a ton of different targets that could fit strategically and very well with Sleep Cycle.
With that said, I hand ov er to Carl Johan.
Thank you, Per. Close by stating that we're yet again delivering continued growth and increased margins. There is a challenging market climate that we are very well positioned. This quarterly result shows off our strength in our App Store position, in our high share of organic installs, and the very low blended subscriber acquisition costs. All this is a result of a product-driven growth that let us, in these times, continue to execute on our product roadmap and growth initiatives.
With that said, I think it's time to take over to questions. Thank you.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero one on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Our first question comes from the line of [inaudible] from Redeye. Please go ahead. Your line is now open.
Thank you very much. Good morning, Carl Johan and Per . My first question, you talked about opportunities on additional wellness platforms. Are you in dialogues with similar players as Gympass, and how big is this opportunity you think?
We are in dialogues and in discussions with several corporate wellness platforms as of now. I mean, we're early in this process on evaluating this. For me, I mean, looking at the top of the funnel for Sleep Cycle to reach more users outside app stores, it's very attractive to me. I mean, thinking about the number of wellness platforms that are active around the world, this constitutes a big opportunity for us. Yet again, we're in an early phase of this, but we're in multiple dialogues at the moment.
All right. Is the, like, unit economics similar when selling through wellness platforms as through app stores, or do you gain more margins or less margins, or how does it look in general?
In some cases, they are very similar to app stores, where the wellness platforms basically are resellers. The business models across these wellness platforms vary a bit. Some are more engagement driven, some are more like the app stores, and some are more behavioral driven and target driven. They vary a bit.
Okay.
For Sleep Cycle, I can just add that it's a good deal from a financial perspective with these platforms. We have different revenue models, but in total they generate the same as the sales through Apple and Google.
All right. Yeah. Have you seen any impact from Apple's new sleep tracking updates in iOS 16 and watchOS 9 on your organic subscriber intake?
No, we have not seen any direct effect of they releasing sleep tracking as of today. I believe that they are pushing sleep more, and I think we will see quite the contrary going forward. I mean, looking at users right now in Sleep Cycle, we still see that the number of users that actually have an Apple Watch is quite high. The number of people that actually sleeping with the Apple Watch on the wrist is continuing to be quite low for the moment.
All right. Are you seeing normal seasonality patterns re-emerge after the pandemic? Do you think, like, more flexible work with people perhaps working more from home two days a week maybe, could impact you in any way?
No, I mean, in our daily active users, we haven't seen any patterns of that. The only thing that stands out this quarter is just that the seasonality during the summer has been a little bit lower, as we mentioned in the presentation. In terms of engagement from the user, we haven't seen any direct effect of people working from home to a larger extent than before the COVID.
All right. It would be interesting to hear your thoughts on the decline in installs. Like, is it more the market in general, or is it something with the app? It would be interesting to hear your thoughts.
Yeah, I mean, you really need to understand these kind of effects. You really need to look at the big picture and to look at like Sleep Cycle download trends like in the last five years. Being on app stores and having a lot of share of organic installs means there's a lot of volatility in that intake as well. So I mean, we have seen similar trends previous years where it goes down more during the summer, but the next year is picking up.
So it's very, very hard to kind of attribute this lower intake during the summer to something specific. I mean, as both me and Per mentioned, we're also seeing that we're coming back to better levels right now as well. Also one thing worth mentioning also is that Q3 would have a very high exposure in social media as well, affecting our new subscriber intake. That lets us meet the tougher numbers for this year as well.
Yeah. Okay. It seems like you are now going to launch. I think you said 30 new courses and programs, and I know that you launched the first part of your sleep training platform on this individual sleep pattern. How do you see this engagement in the new sleep training platform, and how do you think the new courses will drive engagement in Q4 and forward?
No, I think it's very early to say. Right now we're trying a lot of different content. I mean, the big vision in this is really to connect. I mean, to put the user's sleep data and sleep health in context. For example, I mean, we say if we get a new user who uses the app for the first night, we detect that they are snoring for a couple of hours. Right now in the experience that is kind of where the journey stops.
Where we're heading with this is really to be able to contextualize that number and say, "Okay, this is snoring. This is a lot of snoring. This is a little bit less of snoring." And also provide programs and courses to improve different types of sleep issues. This is the first deployment in that user journey, so to speak, and also connecting this with insights and further tools around sleep issues.
Right. One last question. How is the price optimization strategy going? Is it progressing according to your initial plan, or have you paused somewhere, or?
I think it's progressing well. I mean, this is a market-by-market approach right now. The markets really differ a lot. I mean, the pace we're rolling this out is kind of a little bit slower than we initially thought. I think we're making progress, and we see in the overall picture that there are room for price increases in lots of markets. That is the takeaway, that we will continue to do this, market by market.
All right. Understood. Thank you very much. I think that was everything from me.
Thank you.
Thank you. Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. Our next question comes from the line of Dennis Berggren from Carnegie. Please go ahead. Your line is now open.
Thank you. Morning all of you. So following up on questions regarding the seasonality patterns that you mentioned, I understand that there will be differences depending on cohorts, marketing spend, external effects. I think you mentioned that you had a TikTok boost in Q3 last year. Looking at the sequential development between Q2 and Q3, you had a net intake of +30K subscribers, compared to Q2 over the past two years. Is there something specific happening this year? Or how should we think about this seasonality in general?
No, there's nothing specific. I mean, the main reason for it is, I mean, price adjustment and quite a bit lower on the summer month here. I mean, going forward, it's very hard to say. What we're seeing now is the trend is pointing upwards again. I mean, we have seen this several times during the last five, six years. We're not too worried about it at the moment.
Got it. Regarding conversion rates and retention rates, you mentioned stable or slightly improving. Is that also on a quarterly basis?
Yes, it is. I mean, right now we're driving a lot of initiatives on the initial conversion. As I was mentioning during the presentation, we're also looking at the free usage tier. As of now, we're pretty generous in offering Sleep Cycle to users that are using the app for free. Right now we're conducting testing around that that will drive our initial conversion upwards. That is the trend we're seeing in these tests as of now. It's really too early to comment any specific results on that initiative as of yet.
All right. On the ARPA development, could you help us to sort out the direct impact from the new price increases? Because we know from before that you had a sort of underlying positive trend coming from having a larger base of users paying a higher price, and then you increased prices quite substantially in some selected markets here. Would it be possible to give some indications of the direct impact from the latter?
Yeah. I think the impact from the price increases this year that we started with during Q2 is limited on the numbers we have presented now and then on ARPA. I think the ARPA uplift we see now is mainly attributable to the price mix and also some FX as well. I think from next year we will see more impact from the price increases implemented this year.
Perfect. Then finally from my side, again, very strong margins. Are you satisfied with the marketing investment during the quarter, given this whole outcome on subscriber intake and earnings? Then if you perhaps could add some comments around lifetime value to customer acquisition cost models, how are those trending, given the much higher ARPA in some selected markets, I assume that model should improve quite significantly.
Yeah. I think we're overall happy with where we are in terms of the major channels that we're active in. Right now, as we mentioned during the presentation, we're ramping this up. Always as you ramp the marketing investment up and adding channels, you see a slightly less attractive performance in the beginning. But I mean, in general, we see there is an opportunity and we can see like prices, marketing prices and prices on different platforms are coming maybe to a peak here now.
We've seen that in other areas where it's starting to kind of decline a little bit. We haven't seen that yet, but it's not impossible to think that marketing costs will be coming down in the coming quarters. To be active in several channels and to have the marketing machine going, I think that's very important for us now during Q3 and Q4. We're happy with the LTV/CAC ratio as of now in the major channels.
Okay, perfect. Thank you.
We had one question submitted via email. The question is, are Android and iOS equally important platforms for Sleep Cycle?
Yeah. I can start that. Yes, they are, of course. I mean, right now we're heavily tilted towards the iOS platform. We see their revenue is on a different level from that platform and a higher intent to purchase and so forth. To me, looking at the growth rate, just the last 12 months, we can see there's a lot of opportunity in the Android platform, and we can see that has been developing quite well during the last year. Continuing investing equally in both platforms.
Thank you. There are no further questions from the audio line, so I will hand the word back to the speakers for any final comments. Please go ahead.
No further comments from me either. Thank you all.
Thank you.
This now concludes today's conference call. Thank you all for attending and you may now disconnect your line.