Welcome to Sleep Cycle Q3 report 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. Now, I will hand the conference over to the speaker, acting CEO and CFO, Per Andersson. Please go ahead.
Good morning, and thank you for joining this presentation on Sleep Cycle's Q3 earnings call. My name is Per Andersson, and I'm the CFO and Acting CEO of Sleep Cycle. Q3 was a great quarter, and we managed to break the previous subscription trend, now delivering growth again after we increased the prices last year. Before we dive into the third quarter, I will give all the new listeners a short introduction to Sleep Cycle. Sleep Cycle is a platform for sleep tracking, built on our own patented machine learning technology that leverages the power of over 2.5 billion nights of data. We provide users with insights about sleep, features that make you wake up rested, tools to improve your sleep, and insights about breathing, snoring, and coughing that can be signs of other conditions.
Sleep Cycle is a subscription service available on all common smartphones and smartwatches. We are available in 13 languages, and we have more than 2.1 million users in more than 150 countries. Now, let's dig into the third quarter. We are very happy about the third quarter. For the first time since we increased the prices last year, we have seen growth in the total subscriber base. On top of that, we delivered the highest operating margin since the IPO in the third quarter. In total, we see that our strategy is working, the actions we have taken are providing results, and we believe we are now set for a higher growth pace going forward. Looking at our main KPIs, the total number of subscribers at period end was 887,000.
That was a decrease of 2.7% from last year, but up from 877,000 by end of June. The first time in over a year that we have seen a growth in the subscription base quarter- by- quarter. The growth mainly comes from new subscriptions on the Apple platform, which have been boosted by higher conversion rates, new product launches, and good exposure. To mention it, three things we did well in Q3, which affected subscription growth. One, we very quickly launched new features adapted for iOS 17 and the new Apple Watch iOS, which caught a lot of attention and gave good exposure. Two, we have improved our onboarding and added new dynamic paywalls that really boosted conversion rates. Three, we continued to see good traction for features that were released in previous quarters, which support the positive momentum.
ARPU grew 16% to SEK 276 . Adjusted for FX, ARPU was SEK 254 . During the last year, we have seen ARPU increasing thanks to price increases and foreign exchange movements. From the third quarter, we now also see users renewing on the prices we implemented last year, which will continue to fuel the positive ARPU trend going forward. Revenues grew 11% to SEK 61.1 million in the quarter, and we delivered an EBIT of 34%, which is the highest since the IPO. The 34% margin are also additional cost for change of CEO. Without these costs, the margin would have been almost 40%. As I said in the beginning, we are really happy about this quarter.
The cost efficiency program we launched in Q2 has had immediate effects, and the additional focus on cost-efficient user acquisition really pays off. We are now back to growing the subscription base, and we do that with record high profitability. Looking at the subscription development, we grew 10,000 users from Q2. The positive trend has continued now in October as well, and I believe we have now broken the negative trend from when we had prices in Q2 last year. What can be seen in the graph on this page, we had a similar development when adjusting prices in 2018. It took a few quarters before subscription started to grow again. As a reference, we had an ARPU of SEK 219 in the first quarter 2022, before we adjusted the prices. Now, we had SEK 276 .
With the new user intake growing, that will have major impact on sales and revenue growth going forward. Now, I will spend a few minutes explaining how we develop our machine learning technology and how our massive dataset will create, I will say, endless opportunities in the future. During this year, we have invested in building a new data library, where we will be able to run simultaneous analysis with many more data points. The foundation in this library is built on long data series, where sleep pattern can be traced and then combined with not only data about coughing, temperature, and noise levels, but also with personal data and local data from a geographic region. By combining even more data, we can provide users with more insights that are tailored around that particular user and similar personas.
For these computations, we use what is called contextual bandit setup, which is a type of equation that really combines the power of long data series. For Sleep Cycle users, this means we will be able to launch new features with better sleep analysis, new health tracking metrics, and a more dynamic experience based on individual user needs. As a first step, we will include this type of data in our journal. Later on, we will present more metrics, and eventually, we will launch what we will call a Me tab. That will be the go-to point in the app for personal health and sleep data.
This kind of product development is really a way to increase the user value and create a better user experience, and the investment that we have made in the backend technology will lay the foundation for how we can continue to expand our product offering based on data-driven insight. Now, we go back to the financials. Taking a look at the profit and loss, the third quarter really showed that our strategy and the measures we took in Q2 are working, and that we are very successful in cost-efficient user acquisition. As I said in the beginning, we delivered our highest EBIT margin after the IPO in the third quarter. Revenues grew 11.1%, which was 2.6% currency-adjusted. Since we accrue our sales over the subscription period, the growth in subscription from the third quarter can hardly be seen in these figures.
Going forward, that impact to be more visible. We capitalized in total SEK 1 million related to development expenses, of which about SEK 100,000 were internal costs. The majority of our investment in material assets during the last year is related to the new Sleep Cycle Kids app. From the fourth quarter, we will increase the commercial focus on this product, and from next year, I believe it will start contribute to the earnings. Other external costs are significantly lower than previous year, a direct result of the cost efficiency program launched in Q2. We are successful in attracting new users in a cost-efficient way, and our marketing spending was SEK 4.3 million in this quarter, compared to SEK 10.2 million last year. Included in OpEx is also about SEK 1.1 million in recruitment expenses related to the new CEO.
Staff costs increased somewhat from last year, but the increase is fully due to severance paid to the previous CEO. The number of employees in the third quarter were 39, compared to 49 by last year. Our EBIT margin was 33.5% in the quarter, up 50% from last year. Still, we had some extraordinary cost of the change of CEO, meaning that the underlying profitability is even stronger. Cash flow was about SEK 15 million , SEK 15 million in the quarter, which is a bit lower than normal due to timing effects of Apple payments, which were paid after the balance date. Still, we held SEK 180 million in cash at quarter end. The first nine months have delivered stable revenue and profit growth.
For the full nine months, the number of subscriptions and the new user intake decreased compared to last year, meaning the revenue growth of 11.5% mainly comes from FX and the price increases. Other OpEx was in line with previous year, but with large deviations between the three quarters. In general, lower marketing spending has been offset by an increased use of consultants and professional services for the nine-month period. Staff costs are affected by severance pay related to the cost efficiency program in Q2 and due to the change of CEO in Q3. But the underlying staff cost is considerably lower this year compared to 2022 due to that we are fewer employees. EBIT developed in line with revenues, while adjusted EBIT increased 26%.
Commenting on the outlook and our focus areas, this was the first quarter since we increased prices last year, that we again saw an increase in the subscription base. We broke the negative trend, and my view is that we currently have a strong momentum, supported by lots of good initiatives that will continue to grow the subscription base in the coming quarters. On profitability, we continue to focus on cost-efficient user acquisition. The efficiency program from Q2 is now fully implemented, and I expect EBIT, EBIT margin well above 30% in the next quarter. On the organizational side, our new CEO, Erik Jivmark, will join first of November. He has an interesting background, combining digital and customer experience with software and hardware development. I expect us to communicate and update the strategy later on with increased focus on revenue growth.
In the short term, our focus will be on the core product development with limited organizational growth. To sum up the quarter, we delivered record high EBIT margin. We are back to positive subscription growth, and maybe most important, we continue to see good momentum and traction across all initiatives. In a few days, I will hand over to Erik Jivmark as CEO, and I believe we now have a solid and very profitable foundation to build on to further develop the company. With that, I leave over to questions and over to the operator.
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 Mark Siöstedt from Redeye. Please go ahead.
Thank you, operator, and good morning, Per.
Good morning.
So, first, could you expand a bit on the positive momentum you are seeing in the net intake of subscribers? You mentioned dynamic paywalls, new product launches, etc .
Yeah. So I think the very positive development that we have had in new subscription intake this quarter comes from a combination of initiatives. So starting with the increased exposure, which is very important for us, is that we had a very good cooperation with Apple, and by that, we plan to release new features when they release their new iPhone 15 and also the iOS 17. So actually, on day one of that release, we could release our features that are taking advantage of the new updates in iOS 17. And by doing that, Apple, they obviously want to promote their new features, meaning they list us in App Store, and we get really good attention, so to say, very good exposure.
So that's one key cornerstone here. You mentioned dynamic paywalls and so on. We have talked in the previous quarters that we are developing the onboarding process. We spend quite a lot of time in understanding how the users behave in the onboarding and in the first seven days before they convert to premium. So what we do is that we really work to give the user a better experience, to really expose our value and our features, and by learning more about how the users behave, we can then become more effective in how we convert users. And that is really what we have been successful in this quarter.
Also worth mentioning is that we have a free user base of more than 1 million people, and this is people that currently use the free version of Sleep Cycle, but they are very engaged users, lots of them. So, what we do is that we, when we launch new features, we really try to show them for our free users and make them want to convert to premium. And, I think, during the first half of this year and the first nine months, we have been able to release lots of new features, like the breathing disruption feature, for instance. And by exposing these features for our free users, we make lots of them to convert to premium.
So it's basically a combination of new features that attract users. It's good exposure in App Store, and it's also how we can convert free users to premium users that is a part of this momentum that I talked about.
All right. Interesting. And back to the iOS 17, so the competitors, how fast were they when they released, like, their new version? A few days after, or...?
Well, well, I don't think anyone was as fast as we, because we released it at day one. And I'm not sure if any of them have actually adhered to these new functions. I believe, I mean, we have been in contact with Apple since the spring, basically, about this iOS 17 release, so I doubt anyone could be as fast as we were.
Okay. Could you update us on the baby app? How is that project going?
Yeah. So we had the first release of the baby app this spring. What we have done now for about half a year or so is that we have received feedback, we have updated the app, we have made bug fixes, and we have also added a few new features that we understand are important for the users. So right now, in Q4, we will start to really push traffic into the app, and we will do that by some marketing investments, but also from pushing traffic from Sleep Cycle to Sleep Cycle Kids app. And what we will evaluate now is really how the growth and the conversion mechanic work. Before we really...
Before we do a big launch, we want to make sure that we know that when people download the app, we have the right mechanic to actually make them experience the value of the app and subsequently to convert into premium. So that we will evaluate during Q4. Another important part that we are now looking into in the kids app is that since the reason for launching the kids app was that kids and sleep is a very common problem. It's a very direct problem that most parents can relate to and we believe from that, you can really build a good value proposition.
So with a good value proposition, a very defined target group, we believe we should be able to reach that group in new channels by different kind of marketing and so on. So that is also something we will evaluate now in Q4 and from next year, as I said before, I think we should be able to press the throttle and really start to see earnings from this app.
All right. And, I mean, how should we think about marketing going forward now when it has been scaled back a bit, but, maybe you want to put a bit more marketing into the kids app? And in general, what do you see in terms of competitors, other sleep-related apps when it comes to marketing efforts in this market?
Yeah. So we had about SEK 4.5 million in marketing spending in Q3. I would expect about the same, maybe SEK 5 million for Q4. As I said, going forward and past into the next year, I believe we have to come back on that because we have our new CEO starting now, and I know that he has a few commercial ideas that I really think could boost our growth. And that also includes marketing and different kind of PR and other activities. But commenting on the other question about our competitors, we see that there are some competitors that are still investing a lot in performance marketing. I'm not sure what return they actually get on that.
But I think what I really want to stress in this quarter is that we have been very successful now in this cost-efficient user acquisition, meaning that we can drive growth without investing too much in marketing, and that's really what—where the profitability comes from.
All right. Thank you very much, Per.
Thank you, Mark.
The next question comes from Axel Ericsson from Private Investor. Please go ahead.
Hi, good morning, Per, and thank you for the presentation today. My first question was actually a bit around that subscription model and the freemium user base you mentioned, 'cause it seems a lot of the apprehension in converting customers seems to be around that annual subscription model, where customers are taking that upfront cost of sort of $30. And I know you've got different subscription agreements across markets, but have you started thinking a bit more around shifting this to a more shorter-dated subscription across different markets?
Yes, that is something that we have been evaluating. What we have seen in the past is that we haven't seen a very strong correlation that people tend to convert to shorter subscriptions compared to the one-year subscription. So what we've actually been focusing now on is, when after we increase the prices, on the other hand, that gives us more room to drive campaigns, discounts, and so on. My short answer to that question is that we haven't seen very successful results in different types of subscription length. On the other hand, we are more successful in attracting users when we can apply a discount or a campaign or do some kind of bundles, for instance.
Understood. Thank you. I had a second question, just, I know you spoke a lot about the initiatives you take and sort of improve the conversion rates and exposures across App Store and Google Play, but could you talk a bit about the initiatives you're taking to reduce the churn of the current paying subscriber base?
Yeah. So obviously, churn and our renewal rates are very important metrics, and we do a lot of things to improve the renewal rates. But basically, what we do is we want to provide the users with more value in the app. We do that by adding on more features. But then it's really important to make the... Well, the most important thing I would say is to make the user continue to use the app. I think we lose most of our users with, let's say, holidays. When people have holiday, they don't use the smart alarm on the phone, and then when they go back to work, they forget to start using Sleep Cycle again.
So, I think what we do is really we try to work on the engagement, and we try to launch features that will make the users engage for a longer period of time, so to say. So on that note, actually, we are soon about to launch a small game that we call Alertness or... Yeah, which will basically be a game where the user every morning can do a quick game, where they test their cognitive behavior and how fast they can react to different things. And that reaction time can then be linked to... to how you sleep.
It's for one sake, it's a very good feature because it really shows the importance of good sleep, and that's really tied to science. There are a lot of studies in how sleep affect your ability to perform, so to say. But what we're also seeing when we have tested this feature is that users that do this test every morning, that they are more likely to use the app for longer periods of time because you increase the engagement. So yeah, short answer, we do a lot of things to improve the renewal rates, but mostly it's about the engagement, and keep the users engaged and not fall out from using Sleep Cycle.
Yeah. That's very interesting. Thank you. I had one last question, but that might be more suitable for when Erik joins in Q4. But I'll ask it anyway and see if I have to ask it again next quarter. But I was just curious, you know, around the business model, where you've now got quite limited sort of investment requirements, you've got prepayments, you're cutting costs, refocusing on the core product. And then just considering how well-capitalized Sleep Cycle is today, it'd be great to get an update just how you're thinking about your current sort of capital allocation strategy and what you're gonna do about that increase in cash on balance sheet.
Yeah. So part of that is obviously a board question, and then last year, we implemented a dividend policy, saying that we should divide between 40% and 60% of our net profit. I expect that that will continue. But besides that, it is, as you say, now we have a really good cash flow. We get paid in advance, and now we have improved our margins. Without saying too much, I believe that our new CEO, Erik, he wants to use this position to create more growth, at least some of our, let's say, profitability or some of our cash, to really try to find new ways of attracting new users. And I think what we're really showing now is that we can operate this business on very high profitability.
I think for both the business and for our shareholders, I think it—now we need to focus on growth again and make sure that we can increase the growth rate while also being profitable, of course.
Okay. Understood. Thank you very much.
Thank you.
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 Per for any closing comments.
Well, thank you a lot for listening and for taking part of this conference call. As I said in the beginning, we are very happy that we now deliver our highest EBIT margin since the IPO. We are back on positive subscription growth, which is really the engine for our business. And maybe most important, what we can see so far is that that momentum continues, and I think now we are aiming for a higher growth rate and very good profitability. So thank you very much for joining today, and see you next time.