Welcome to the Sleep Cycle Q2 Presentation for 2023. 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. I will hand the conference over to CEO Carl Johan Hederoth and CFO Per Andersson. Please go ahead.
Thank you. Good morning, and thanks for joining us today. For today, in addition to comment on the quarterly results, I'm going to focus on two subjects. Firstly, we will be allocating some time to discuss the cost efficiency strategies implemented in May. Secondly, I'd like to address our current trend in total subscriber count, as well as the factor influencing it. In May, we announced a set of measures to increase our operational efficiency, and alignment to our current market climate. The program affected approximately 10 positions within Sleep Cycle, as well as a reduced marketing spend. Per will dive deeper into what to expect from a financial perspective later on, but to me, this is about focus on our strength, that is our product and our users.
The cost reduction has a set of direct impact on the business. We are discontinuing direct selling to businesses. Instead, we're putting more emphasis on scalable wellness platforms such as Gympass and the like. We are downsizing our marketing spend, decreasing new investments and new channels going forward. However, in terms of marketing, it's important that we will continue to run our positive LTV CAC campaigns, where we will get a quick return on our spend. I don't expect this cost reduction will have a significant effect on either our revenue or the overall number of subscribers going forward. What this means is that these measures enables us to shift more attention towards new features and product development.
What I believe you should expect is leaner, more efficient Sleep Cycle, with more innovative features releases, to our millions of users, driving higher conversion and more subscribers going forward. Secondly, subscriber growth. Compared to the same quarter last year, we're still seeing a decline in total number of subscribers, as we have seen in the last couple of quarters. However, during the year, and with an emphasis on the last quarter, we have made several important steps towards bending that curve. This initiative is starting to materialize as we're seeing small but important indicators that the decline in subs is starting to stabilize and even grow on a month-to-month basis.
Actually, while the number of subscribers is down on a quarterly basis compared to last year, during both May and June, we saw a growth in subscriber inflow year-over-year, leading to a net add of total subscribers in these two months. This shift is a direct result of dedicated actions and initiatives commenced during the quarter, and I will get into more details on this later on in the call. Next slide. I will quickly run through the KPIs for the quarter. Subscription is at 877,000 stabilization compared to last quarter. ARPU still seeing growth in ARPU, 16% compared to last year. It's an effect of the price adjustments commenced during the year.
11% revenue growth, coming in at SEK 58 million, an adjusted EBIT margin at 30% as an effect of the cost reductions. Thank you. Over to Per to get into the numbers.
Thank you, Carl Johan. Taking a look at the subscription base, we saw a stabilized development from the first quarter and a limited decline of 4, 000 users. Renewal rates were good, but due to a small amount of users that were up for renewal, the renewed amount of users was fairly low. As we wrote in the report, the new user intake grew during the second quarter, which is very positive. In the last three quarters, the new user intake has declined as a result of the price increases implemented in Q2 last year. We saw growth again, and we can see that the efforts to improve conversion rates and to drive growth through feature releases are starting to give result. Revenues increased 11% from last year. Adjusted for FX, the growth was only 1%.
Still, we managed to offset the decline in the subscription base from last year through higher prices and improved ARPU. Compared to Q2 last year, the number of subscriptions decreased 5%, and we still managed to see revenue growth, also adjusted for FX. ARPU improved in total SEK 36, and of that, SEK 14 was price increases and SEK 22 was FX. During the second quarter, we launched an efficiency program to refocus on our core business. The program allows us to free up resources, resulting in an expected reduction in costs of SEK 25 million on an annual basis, aiming for an EBIT margin about 30% going forward. The reductions are focused on staff, marketing, and other purchases.
We expect to save about SEK 7 million in reduction of staff related to some positions that are redundant when we focus on the core business. As part of this refocusing and discontinuation of certain initiatives, a couple of consultancy agreements have also been terminated, including the other OpEX bar on this slide. Historically, Sleep Cycle has been very successful in cost-efficient user acquisition from organic channels. We will increase our efforts in these areas with new feature releases, improved onboarding, and other actions that will boost conversion rates. As a consequence, we will reduce marketing spending and concentrate marketing to platforms and campaigns with good CAC LTV levels. In total, we expect to save about SEK 10 million on reduced marketing on annual basis.
By focus our resources and also, due to a smaller organization, we also expect savings in other OpEx, which together with less consultants, as I mentioned, will save about SEK 8 million. The impact on revenues from discontinuations of some initiatives is expected to be limited. As Carl Johan said before, with these changes, we will be able to put more effort in cost-efficient user acquisition. This program will help focusing our resources on the core business, while also free up resources that will result in a cost reduction and improved margins. Carl Johan will elaborate on user acquisition.
Thank you, Per. I wanted to touch briefly on the stabilization in total number of subscribers, and I want to address three important drivers to this trend that we have seen in May and June. First of all, we have been successful in a range of feature releases, and when we release new features, there are two important factors that we look at. The first is engagement. That is how many users that are actively engaging in the feature. Secondly, conversion, how the release of the feature is affecting our ability to convert free users into premium subscribers. In the beginning of June, we released the noise level feature in Sleep Cycle. High noise level during sleep can have adverse effect on your health and on your sleep quality.
WHO, the World Health Organization, recommends less than 40 decibel in bedrooms during the night. Given the effect noise level can have on your sleep, we believe this is something our users like to track and follow up on. In terms of conversion, this feature has proven to be very successful. It current ranks among our top three features that drive conversion, and since its rollout in mid-June, it has directly resulted in approximately 3,000 new subscribers during the quarter. Secondly, we had, as we always had, a high focus on our onboarding experience during the quarter, been very successful in optimizing the user flow, the messaging, and the paywalls, that have significant contributed to a better conversion rate during the quarter.
The last point I want to address, contributing to the stabilization in total subs this quarter, is a reinitiated growth in the China market. This is a result of an overhaul of our App Store presence, including translation and localization, and the fact that Sleep Cycle has been lifted up as a recommended app in Apple Health in China, a position that drives significant installs every day. This, in combination with the updated onboarding experience, has lifted new subs from China significantly. To recap, we have seen a stabilization in total number of subscribers, even with an increase the last two month.
This is driven by successful feature releases, such as Noise Level tracking and Breathing Disruptions, an optimized onboarding experience in terms of flow and mechanics, and a growth in China market, driven by getting a position as a recommended app for sleep in Apple Health China. With that, I'll leave over to Per.
Looking at the profit and loss, in Q2, we saw a revenue growth of 11%, which was 1% adjusted for FX. Compared to last year, subscriptions declined 5%, but we managed to offset that by higher prices, and on top of that, FX. During the quarter, in total, SEK 1.6 million was capitalized, which mainly relates to continued development of the Sleep Cycle Kids app. SEK 0.6 million was internal expenses, which are seen on the P&L. Going down the P&L, OpEx developed positive compared to last year. Marketing spending was on the same level as previous year, while the use of consultants and other purchases were reduced as part of the efficiency program. As part of staff costs, we recognized SEK 4.5 million in non-recurring items related to severe pay for the reduction of employees.
With fewer employees, we will see decreased staff costs going forward. D&A increased due to capitalization of costs, also due to that, we moved into a new office in March this year. According to IFRS 16, the leasing cost is recognized on the balance sheet and then depreciated over the P&L. The EBIT margin was obviously affected by non-recurring items in the second quarter, but adjusted for that, we reached a 30% EBIT margin. I said before, with all the reductions from the efficiency program, we foresee an EBIT margin above 30% in the coming quarters. The operation generated a positive cash flow of [SEK 90 million] for the quarter, in total, we held SEK 105 million in cash at the end of the period. We obviously also paid a dividend of SEK 142 million in May this year.
For the first half year 2023, the P&L developed similar to the second quarter, with the main difference being higher spending on consultants and services in Q1 2023 compared to 2022. Revenues grew 12%, 2% adjusted for ex- FX, with the higher prices and improved ARPU being the main drivers behind this improvement. Adjusted for the non-recurring items in the first half year, the adjusted EBIT margin was in line with last year. Looking at the outlook, we still see an uncertain market. I said before, it was very positive to see growth in new subscribers in Q2, possibly that trend will continue. On top of that, we see continued growing ARPU from the price increases last year that may accelerate sales going forward.
On profitability, our focus now is to realize the full savings in the efficiency program and to grow the subscriber base through cost-efficient user acquisition. We target EBIT margins about 30% in the coming quarters, with lower costs for staff and marketing going forward. On the organizational side, we reduced the headcount with about 10 people, including both staff and consultants. Going forward, the focus is on core product development and cost-efficient user acquisition to grow the business further. With that, over to Carl Johan for a final comment.
Thank you, Per. To summarize, our higher pace in product development is starting to materialize. Second half of the quarter, we are seeing increase in total subs, which is, for me, the ultimate telltale that we are doing the right things. With cost reduction and an even increased focus on the product, I believe that we are well-positioned towards profitable growth for the coming quarters. By that, I'll leave over to questions.
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 Mark Siöstedt from Redeye. Please go ahead.
All right, thank you. Good morning, Carl Johan and Per. Could you update us first on the price optimization rollout? Have you conducted most of the pricing changes in the near to medium term, or do you still have some impactful markets left?
We are fully rolled out on some of our biggest markets right now. In terms of the full impact, we're not there yet. We still have certain markets that we are testing on, so we have still opportunities to push this further for the coming quarters here. Per, do you have anything to chime in?
As Carl Johan said, now we have been really focused on driving subscriber growth, and we see positive results on that. There are still upsides in implementing high prices on more markets going forward.
All right. Do you see signs of new users getting used to the higher price levels now, or do you think that will take some time?
Definitely. If we look at, I mean, all the work we have been doing, the last quarter in terms of feature releases and conversion optimization, if you compare new users and ARPU towards last year, you can see that we are actually getting more users in. Having higher conversion rates on a higher price level at this point. Definitely, we're getting up to speed with the new price level, and we've done a tremendous job in increasing our capability of converting free users.
All right, interesting. It seems like you have an exciting pipeline for the second half. Do you think you have some features that you have not yet released that could have the same impact, for example, as the noise feature?
Yeah, definitely. As mentioned, as I have been talking a lot about the last quarters, is that we've been really focused on the pace in the product development and the velocity we are releasing new features, and I'm very happy with the roadmap going forward. We have a lot of new things that I am very excited about that we're currently testing or developing at the moment. Definitely.
Yeah, and could you comment on the Kids App? How are the iterations going?
Yeah, we have the Kids app is released. We have a good momentum in the product and in the product development. To me, I think we're still early in that journey, and we are in an exploratory phase in that product. We are getting good attention. Apple is surfacing the app a lot, and we have a, compared to Sleep Cycle, a small, but we have a steady inflow of users coming into the app. Right now, gathering the data, learning a lot from our users' feedback, is the most important thing right now before we push even more traffic from Sleep Cycle.
Yeah. All right. So you talked about the improved conversion, et cetera. I track reviews on your app in like app stores, and I've seen that some users that have been on the free version appear quite upset by the paywall. Are you concerned that their irritation and negative reviews could spill over on the organic inflow of new subscribers, or is that not a big issue?
That's a very good question, Mark. Of course, we are super focused on the overall appearance and the perception of Sleep Cycle, of course. To mention of some of the reviews and the feedback, we do certain tests, and some people are getting into pretty aggressively cohorts that we're testing. We shouldn't, you shouldn't draw any higher conclusion on what we see in reviews. Yes, we're super focused on monitoring reviews, retention, and the overall free user experience. That is important to us. Yes, it's a good question, and we're super focused on it.
All right. Yeah. That's all from me. Thank you.
The next question comes from Dennis Berggren from Carnegie Investment Bank. Please go ahead.
Thank you. Good morning, guys. Just a quick one on cost development. External expenses decreased quite heavily here, quarter-over-quarter. How much of this decrease is related to lower marketing spend versus purchases of external services? Should we expect this level to be representative as a run rate for marketing investments going forward, given what you just mentioned on the changes related to this cost efficiency program?
Well, well, well, I think, of course, there will be differences between the quarters, but as we showed on the previous slide, we aim to reduce the total cost base by SEK 25 million on full year. In that example, we had the cost base from Q1, which was extrapolated to represent the full year. Of that, we then can have a look at that. I can explain it more in detail. In that, we see that on annual basis, about SEK 7 million will be reduced from staff, and SEK 10 million from marketing, and SEK 8 million from other OpEx and consultants.
In this quarter, now in Q2, we released this program in mid-May, so we haven't seen, also adjusted, adjusting for the non-recurring items, we haven't seen the full impact in this quarter. I believe if you look at Q1, for instance, and do like we have done here, extrapolated for a full year and then reduced cost as described here, that will represent a high-level view going forward.
All right, very clear. On the subscriber change in Q2, I mean, you mentioned that you've seen positive effects on that. Still, we are seeing a year-over-year decline. First of all, from what actions are you seeing the best returns? Also, do you see any changes with regards to the market environment in the sort of abilities and opportunities to generate new installs? I mean, is it tougher to generate a new install today compared to one and a half year ago?
Yeah. Thank you. First question, where we're seeing the best result is when we release new features. That in combination with surfacing these new features to a user, packaging them with the right messaging, and so forth, that is the one and second and third place in what causes our subscriber growth right now. In terms of market climate and installs, I mean, it's not neither harder or more easier for us to get more installs. We see that when we're doing optimizations in, for example, the App Store presence and localizations to Chinese, for example, that in turn have effects on Apple picking us up and recommends us for Apple Health.
I mean, getting a spot in Apple Health in the China market is worth several millions in marketing spend. That's a very good job of the growth team and the marketing team here at Sleep Cycle.
Perfect. Then just finally from my side, I think, I mean, you're quite clear on your EBIT ambitions going forward, but I find you to be slightly more, let's say, conservative, with regards to growth. I mean, could you give some flavor on when you expect to see the total growth on subscribers changing for the positive? Do you expect that to occur already in the second half of this year, or perhaps more reasonable to expect that later on? Thanks.
No, in terms of growth, I believe, as mentioned in this presentation, I mean, we already see a stabilization in subscriber growth. Of course, how steady that is still hard to speculate in. But to me, I think the most important thing is that this stabilization in subscriber is a direct effect of the initiatives that we have been doing. And that is, to me, a proof that we are doing the right thing and that these changes are more or less stable. So I'm very happy with that.
In terms of when we see a subscriber growth on a year-to-year comparison, it's very hard, but I think we should see a continuation of this stabilization and a flattening out during this year, for sure.
Also worth mentioning that in Q2 last year, we started to roll out the higher prices, meaning that now users renew on higher prices, and that obviously will also give a boost to sales.
Perfect. Very clear. Thank you very much.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
No, thank you. Thank you all for listening in. I'm happy with the quarter, getting on the right trajectory for the coming year here. Thank you all for listening in.