Welcome to Sleep Cycle Q4 Report 2022. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now I will hand the conference over to the speakers CEO, Carl Johan Hederoth, and CFO Per Andersson. Please go ahead.
Thank you, 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 off by providing an update on the fourth quarter and our core business KPIs. After that, me and Per will comment on the updated dividend policy and the proposed dividend. Finally, I will quickly walk you through the highlights on recent progress, and Per will finish off by take a deeper dive into our financial performance. It's been a good quarter for Sleep Cycle as we've taken several important steps in product, pricing, and marketing. We are still seeing headwinds in the sector in terms of declining App Store engagement and thus installs.
We are at the same time meeting some tough months from last year in terms of subscriber intake. Yet, even in these times, we are again delivering growth and profitability that shows off the resilience in the product and our business model. We keep on investing in product. We have never invested more than we do right now, and you will see that play out in a higher pace during the coming period. The positive side on investing in product is that it not only drives more users and retention, but we also make room for price increases. Price increases with higher engagement improves our customer lifetime value. Lifetime value is important to us. It makes room for better and wider marketing, reaching even more users. This is really the cycle of our business.
Despite the headwinds and macroeconomic conditions, thanks to a fantastic product growth and marketing teams, we have made a lot of progress on that core cycle during this quarter. The Board has decided on an updated dividend policy, with a long-term goal, reaching a range of 40%-60% of profit. In addition to that is also proposed a dividend of SEK 141.9 million in total, which is subject to AGM approval in May. I mean, Sleep Cycle is a very efficient and cash-generative business, and we have a long history of both profitability and high growth. I'm confident in the product and the business, that we can continue to deliver on our long-term goals, including increased investment in tech growth and product in combination with a yearly dividend.
I'll let Per talk about the details regarding that.
Thank you. Sleep Cycle has a history of high profitability and strong cash flows. In 2022, we managed to deliver an operational cash flow of SEK 60 million, while also increasing investment in product development, marketing, and organization. As per 31st of December, we had cash holdings of SEK 233 million and no debts. We are confident that with an annual dividend as well as with the extraordinary dividend, we will still be able to invest for growth and to deliver on our long-term strategic targets. Given our solid financials, we also have the flexibility to act on M&A and other opportunities, we believe. Carl Johan.
Thank you. We can go to the next slide. Take a look at the numbers for the quarters. Regarding subscriber growth, we're seeing lower levels compared to previous quarters. There are a couple of pieces to that puzzles that I want to share some context on. First, last year, December and also January, was tremendous in new user intake. As always, with our one-year subscription, we have, after a period of higher intake, a larger than normal volume of churning users the year after, affecting the net subscribers. Secondly, we have made significant price adjustments to certain markets. As expected, we see initial lower conversion rates on installed to premium subscriptions.
Price adjustments are always a balance between volume and revenue growth, and we're constantly looking at the combined benefit of the business in that specific market where we're doing adjustments. Looking at ARPU, higher prices improves ARPU. We have seen a 14% increase in ARPU during this quarter, which we are very happy with. As I alluded to in the intro, higher ARPU opens up opportunities in reaching more users. The growth in ARPU is basically built upon three components: price adjustments for new users, as mentioned, pricing mix changes in current subscriber base, and also positive FX effect. Looking to the right, revenue margin. Revenue is at SEK 55.7 million, growing 16% compared to last year.
Margins are, as planned, lower this quarter as we've done some deliberate investments into our marketing capabilities. We can go to the next slide, please. A quick update on our strategic initiatives. Starting to the left, more than 50% of our users are sleeping with a partner. Even if we have been able to filter different people in a bedroom, a notable release this quarter has been the deepened audio analysis technology. With this technology, we're able to disentangle analysis from several people simultaneously. It's a great example on how we use machine learning technology together with half million of nights sleep data, and we solve a core customer pain point within the product. It pays off in engagement. Almost 60% of our users that snores have engaged with this feature.
It's quite a fantastic achievement by the teams. We're also heavily focused in optimizing conversion flow. We have during the course of this quarter rolled out a new version of this flow, which have been very successful on the iOS platform, and this flow will be continuously rolled out on the Android platform in the coming months as well. In the middle, during the Q4, we launched on the Huawei platform in China, instantly becoming available to significant part of Android users in the China market. That said, we're now once available, we have lots of hard work in front of us learning the platform, the user acquisition strategies, marketing, and so forth. To the right, marketing, as mentioned in the intro, affecting our quarterly margin this quarter.
We have done some investment in marketing capabilities during this quarter. To provide some context to that, we have added new channels, increased efficiency in existing, and also invested in marketing analytics. That said, we're not changing strategy here. Basically now we have more tools in our marketing toolbox, making us more efficient. Performance marketing is still to be considered an amplifier to the product-led growth, and we're not planning any significant increase in paid in the coming quarters if conditions remain the same. Thanks. I will hand over to Per to have a look at the financial performance.
Thank you, Carl Johan. In the fourth quarter, we saw a small increase in number of subscribers from previous year. From when we started to implement new prices in Q2 last year, we have experienced a decline in new users. Compared to the somewhat 30% average price increases we have now implemented on the largest markets, this is an accepted, expected development. As we said before, we have faced decrease in traffic in App Store during the quarter, which affects number of downloads. In combination with the general economic climate, it's difficult to forecast the impact on future subscription development, and our short-term view is that growth will be driven by ARPU rather than subscriptions. Looking at the revenue graph to the right, we again saw continued growing revenues in the fourth quarter.
The revenue growth in the quarter was 16%, which was 6.7% adjusted for FX. The main drivers was ARPU, which increased from SEK 215 to SEK 244 this year, which is a combination of high prices and subscription mix effects. As said on the previous page, we had continued stable revenue growth and a healthy EBIT margin, although we increased marketing investment in Q4. The platform fees continued to develop positively, meaning their share in relation to revenues decreased. Other external cost was affected by SEK 2.8 million in exceptional items that was related to the public cash offer. Apart from that, we increased our investments in performance marketing as communicated in the third quarter.
With the updated prices, we have increased our LTV, and we now see a quicker return on many campaigns. Staff costs increased, reflecting a larger organization, and the EBIT margin was lower than normally due to the exceptional items. Adjusted for those exceptional items, EBIT was 14%, which was an intentionally lower number due to the increased investments in Q4. Cash flow and cash conversion remained good, we accumulated more than SEK 230 million by the end of December. Given the market development during 2022, especially how several of our peers have developed, we are very happy to be able to present a full-year revenue growth of 16.6%, an EBIT margin of 22%, and operational cash flow above SEK 60 million.
That is a cash conversion of 140% in relation to operating profit. Looking at the revenues for the full year, one part of the growth came from FX. Adjusted for that, the growth was 12.4%. While the growth in new users were limited, ARPU developed very well. The renewal rate was very stable, although on higher volume levels. With stable renewal rates continuously growing ARPU, I believe we will see very good leverage in revenues when the markets have adjusted to the higher prices and new user acquisition picks up again. Going down the P&L, we managed to improve adjusted EBIT from 19.9% to 22% in the year. We did so with increased efficiency in marketing and a generally improved cost control.
In addition, we were favored by Google's decrease of platform fees for new users from 30% to 15%. I'm also very happy to say that we managed to grow the organization in a cost-efficient manner, although the competition for talent is hard. A few words about the outlook in our focus areas. We continue to invest for growth, we still have a strong pipeline of product and feature releases for 2023, which we believe will drive growth. Still, the current market is uncertain, new user acquisitions are affected by the price adjustments implemented in 2022. For 2023, we believe ARPU coming from price adjustment and mix effects will be the main drivers of revenue growth.
As said in the last presentation for Q3, we now taking new users on average ARPU above SEK 300, and for certain markets, well above that. Our profitability target remains, we will continue to invest wisely and with high efficiency in both marketing and product development. For 2023, we expect to continue to increase CapEx as part of our product development strategy. On the organizational side, we were 49 employees by end of 2022. We are looking to strengthen the capacity within product development and more particularly in the machine learning and data science teams. On opportunities, we continue to see many prospects that will materialize in 2023. In addition to product investment, we will continue to look for partnerships, expansions to new platforms, and potentially M&A if the right opportunity arises.
With that, I hand over to Carl Johan for some final words.
Thank you, Per. So I wanna close by stating that we for this year are delivering continued growth and increased margins. We're still having challenging market climate, but we are doing good. We have a good pipeline of opportunities and a fantastic roadmap that we're executing on during this year. The board of directors proposed a dividend of in total SEK 141.9 million . Considering our very cash generative business model, we're still able to invest, do M&As, and act on other opportunities that may arise. Thank you for listening. With that said, it's time to leave over to Q&A. Thank you.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Dennis Berggren from Carnegie. Please go ahead.
Morning, guys. I was thinking of starting with a question on the subscriber growth. I hear what you say on the near-term uncertainty that seem to remain. What would you say are the main factors that are supporting to a reacceleration of the subscriber intake in 2023?
I think the product roadmap that we have in front of us is really exciting, and that's the main strategy on improving the subscriber net intake. That in combination with initiatives we have on the commercial flow right now is looking good. That will be the main strategy on improving the subscriber growth going forward.
Got it. Could you sort of perhaps provide some comments around the intake development during 2022 and sort of the mix between, you know, there are several factors coming into play, of course, between, you know, conversion rates, you have the price increases, but also seeing, like, less activity on the platform side. Could you perhaps sort of try to sort that out for us? I mean, how much is sort of driven by slowing downloads versus sort of conversion trends and so forth? If you perhaps also could add some comments around the recent trading on download trends.
No, I'd say the main driver is just what we alluded to in the intro. I mean, we're having tougher months now in terms of app and app engagement in both Google Play and App Store. So installs, of course. We're doing good job in actually being more efficient in converting the downloads that we get. So if you look at the conversion rates from downloads to a premium subscription, we are continuously increasing that. So we're doing a good job in that. And I mean, as I was mentioning before, improving the ARPU also have an effect on subscriber intake.
That said, it's also like you see that we had in 2018, we have a slower intake of net subscribers, but higher price also opens up for, I mean, discounted offers to free users going forward, and that we have seen previously were a good effect on, so it also opens up for taking in subscribers on discounted packages as well.
I think I can add that as a base, we have a very stable renewal rates. In 2022, that meant that we had a quite larger base to renew on, but still we managed to renew the same rate. As Carl Johan said, we are affected by the traffic in App Store, but we also managed to increase conversion on the traffic that comes, so to say. I think the thing that is the message and obviously also then affected by the price increases.
Got it. You mentioned, sort of the macro uncertainty there. Would it be possible to have some comments on sort of the older cohorts, and if you're seeing any changes on renewals on those cohorts, from sort of a more uncertain macro environment? Then perhaps if you also could add some comments regarding the, y ou know, it seems like the overall health and fitness space have had quite a tough year. I mean, how much of this would you say are related to macro concerns versus, you know, coming from pretty high levels during the pandemic?
Yeah. To answer the first question, I think, I mean, in terms of of looking at all the cohorts, we don't see any direct changes to that except from when we have, like, very high intake from social media campaigns or very broad features on App Store. Because when that happens, we get lower quality cohorts into the app that both have a lower initial conversion rate, but also lower renewal rates. That we are always affected by when we have these high high volume, low intent users coming into the platform. I would think that that is the main message. In our subscriber base, looking back like two to three years, I mean, we're not seeing any higher cancelation rates.
As of now, still performing very, very well, I would say.
Okay. Just finally a check on your outlet slide there. I mean, although expecting increased product investment, we should still expect you to aim delivering against this 20% EBIT target also in the short term.
Yeah. Yeah. We haven't changed that. No, that's the target. As we said before, we still believe we have plenty of room to do the investments we want. That is our target going forward as well.
Perfect. Thank you very much. I jump back in the line.
The next question comes from Mark Siöstedt from Redeye. Please go ahead.
Good morning Carl Johan, and Per. Maybe some of my questions will overlap a bit. My sound was a bit fizzy. What are your thoughts on the subscriber intake? Is it possible to decipher how much of the subscriber intake that has been impacted by the price increases, the drop in App Store activity, macroeconomic factors, IDFA, et cetera? Like, is it possible to disentangle it a bit to get a sense of like the relative importance of these factors?
I would say it's a combined effect on that. We don't wanna go into any details on how much. It also differs a little bit. I mean, the download rates are very volatile. Some months is very much up and down. It's kind of. It's not valuable to comment on short-term trends. It's a volatile business, and it's a volatile ecosystem, I would say. It's a combined effect. I mean, in terms of conversion rate and increasing the price, it is a significant, on the markets where we are adjusting the prices. There are a significant effect on new subscribers.
As mentioned in the presentation, I mean, looking at the revenue per installs that we see on these markets, are, I mean, above two -digit growth on where we're doing the price adjustment. It's a way forward. Also, I mean, increasing the ARPU also increases the capabilities on new marketing. So it's a net benefit for us on these markets.
In the report you write that a new feature that can detect who in a room is snoring will form the basis for many important launches in the future. Could you talk about this new patent and how it can spawn new features that users would like?
Sure. I mean, something that we have been talking about for a long time is looking into breathing patterns and breathing disruptions, and in the long term also sleep apnea, and being able to be pretty accurate when it comes to the basic of analysis in the bedroom, disentangling two-person snoring. That's kind of making a very good foundation on building upon features like looking out for breathing disruptions and so forth. We'll kind of form a basis for other features that are built upon the snoring detection and the breathing patterns.
How many other sleep-oriented apps can do something similar?
I haven't seen, no one doing this. We also have a patent pending on that technology, so.
Do you think like users will notice this difference quite substantially in 2023, like with the new features that you are launching?
Yeah. Yeah. They already do. I mean, since launch, we have a high engagement in this feature. I mean, let me give you an example on how this could work. I mean, before we had this feature, a user could come into Sleep Cycle, sleep one night with Sleep Cycle, for the morning seeing that they snored, for example, two hours, starting listening to the snoring and realizing that it's not my snoring, it's my partner snoring. Even if we are good at doing that with just one microphone before we did release this feature, it's not at any way as accurate as we are now.
Now we give the user an option to say, "This is me or not me." From that input we get from the user, we start learning on the device, and we start getting more accurate. It's like the user needs to do this input like five to six times, and then we're increasing the accuracy by 30%-40%. I mean, just that the user can engage in this and do something and actually make the product better by providing some input to it's a high win for us in terms of engagement and in terms of customer satisfaction.
I think you probably read in the report, Mark, that of the people who snores, I think 58%.
Yeah
adopted the function. I mean, that really shows us that we will get higher engagement, we can potentially attract new users with this function. We also see more, like, positive reviews and stuff like that. That in total, is very beneficial for the product and for driving new traffic and so on. From a commercial perspective, it's also really good, function.
Yeah, it sounds really exciting. Yeah, Per, I think you mentioned that you had introduced like 30% price increases on average. Is this after or before discounts?
No, that's the base price, so to say.
Mm.
Before discounts.
All right. Lastly, could you update us on, like, the partnership discussions? How are the partnership discussions going? Also, how are your current partnerships, like with Gympass, developing?
I can give some color on the Gympass partnerships. We have been seeing very good figures on the Gympass by the end of 2022, and also in the beginning of January here. It's still performing well. I mean, it's a very good way of, for us to attract new users. We can also see that they are very high-intent users. They're coming from a health platform. They have the focus on improving health and sleep. We can also see that the retention and the engagement of these users are much higher than our normal cohort. It's performing well. We just wanna add, like, two or three more of these to the mix.
All right. Thank you.
Thank you.
The next question comes from Erik Larsson from SEB. Please go ahead.
Yes. Good morning. Just to follow up on the subscriber dynamics. You had a lot of good color there, but my understanding is that renewal rates or churn are quite stable. Maybe churn is a bit higher post-price hikes, but relatively stable and that the issue is sort of the net or gross intake of new subscribers that are sort of more difficult, if you could just confirm that. A follow-up to that, how do you look at marketing going forward? You made some changes in your organization to tackle this, and will you sort of combine marketing more with new product launches, or how are you thinking going forward?
Well, I can start by answering to the first question. Well, yes, we can confirm that we don't see any impact on renewal rates, as we said, and we haven't seen any higher churn as well after the price increases. You're correct that it's mainly the new user intake that has been affected both by price increases, but also by the reduced traffic in App Store, mainly. As I said before, I believe when the market gets used to the new prices, we potentially see a more stable download climate.
I believe that our very stable renewals and new prices and in total with the increase in new users that we'll get a very good leverage on sales and revenues.
Yeah. In terms of your second questions, I mean, we're always optimizing the organization. When you look at performance marketing today in our space, I mean, for many of our users, the kind of the user journey already starts when the user sees a paid ad on a social platform or like. I mean, pulling the market team, the commercial team, and the product team closer together, it's kind of important for us to kind of increase both the efficiency in the paid and lowering the CAC, but also get the user engaged in a very early stage in the product choice. It's a step towards improving the first minute in the user journey in the product.
Thanks. Okay. The last question, just with regards to price hikes. Where would you say that you are today in terms of average price for new subscribers across markets today? Then I guess you have some segments or markets that are still pre-price hikes.
No, that's correct. We have implemented new prices on the largest markets, we, as I said before, we have an ARPU, an average above SEK 300 on new user intake. For certain markets, obviously, it's well above that then.
Okay. Great. Thank you.
Okay. Thank-
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad.
Yeah. Thank you. We haven't received any.
There are no more questions at this time. I hand the conference back to the speakers for any questions from the web.
No, we haven't received any questions, on the web today. We thank you so much for participating in this call.
Thank you. Thank you.