Earnings Call: Q1 2020

May 12, 2020

Thank you so much. Welcome, everyone, listening to this call. Sitting here in a small preview at the Storuto headquarters in Stockholm, together with Ingrid Boiner, our Chief Commercial Officer. Hello, everyone. We will be presenting and delivering the Q1 report to you today. So please hang on. Next slide, please. So the first slide shows you the subscriber and revenue growth that we have seen in Q1 this year compared to Q1 2019. This was disclosed in our top line report that we disclosed a month ago. But for those of you that haven't seen it, we grow our subscribers, our paying subscribers with 38%. This is a really good number. We grew the revenue with 45%. People that follow the company know that the higher revenue growth in these quarters are mostly derived from the lowered VAT rate in many countries that we saw full effect of in Q3, Q4 last year, which means that Q1 is a comparable quarter to a quarter with higher VAT rates. So we foresee this positive trend to decrease over the years. That said, we still see countries lowering the VAT rates. I believe it was Spain as the last country on April 23, where the parliament decided to lower their VAT rate on digital publications like ours. It went into effect the day after, so fairly quick motions. Next slide, please. So highlighting the reports that you might have seen. So as I said, the sales are up ending at 4.29 at thestream sales from 2.96% the same quarter last year, so significant growth, as you know. Our subscriber base is now 1,154,000 users, up from 834,000,000 the year 4. The net turnover, 513,000,000, a substantial increase there as well. And worth noting then, of course, is that we successfully completed a directed share this year, February 20. We brought in €948,000,000 to the company before fees. And yes, it was a true success and just before the market turmoil. So we definitely have the cash we need to execute on our business plan for years to come. Next page, please. So might be boring, but these are important stuff as well, New accounting principles starting with Q1. We have informed you in the past that we advanced to this and now we have done it. So starting with Q1 2020, we start using the capitalization model instead of the expensive model for an internally developed intangible asset of the company. So what does this mean in plain English then? Yes. The costs we have for developing our platform and our service are mainly IT costs, The ones that are spent to develop new functionality or new apps or whatever is being put in the balance sheet. It enters the P and L as a revenue under the K3 protocol that we use. So that cost is now instead also a revenue, so the EBITDA effect will be 0 by the transaction. Also, all the audiobook recordings that we do, we do quite a lot. And the audiobook recordings are things that we can use for many years to come. And this is something that we have then activated or capitalized as of Q1 this year. The firm effect of this one is that we get an additional revenue asset of SEK 47,000,000 and a small amortization starting in Q1 by 1.5%. So the net effect on EBITDA level is SEK 45,300,000 in Q1. On the K3, you don't do a retroactive recalculation. So it's really starting from January 1, 2020 onwards. If you look at this margin wise, you can see that we now increased our contribution margin up to 21.6% from 15% as it would have been if hadn't used this new accounting principle. Worth noting as well is that if we would have used or if you compare it to in the past, still our contribution margin is greater using the old accounting principle in Q1 than it's ever been before. So inventory is looking even better with new accounting principle. We had an old semi also with old principle. The EBITDA margin comes in, in Q1 at minus 5% compared to what would have been 14.7% using the old model. So this whole thing makes us look more profitable, but no major change really. It's just that we display it in a way that is usually displayed by all mature companies in the market. I hope you will find this clearer to show our underlying profitability in our 2 markets. Next slide, please. So looking at the details, all the numbers, starting with the revenue line that we talked about before, you can see that we have an all time high in terms of revenue as well at SEK 429,000,000 in Q1. This is a number that is not affected by the change in accounting principle. Our contribution profit though increases substantially. So you can see it increases from 64% to 93% almost based on this accounting principle. Contribution margin then follows up from 15% 21%, as I said before, but you can also see at the historical numbers that even the comparable actually is higher than it's ever been before. Our paying subscribers, yes, you can see SEK1154 is what we mentioned before and the ARPU is unchanged from our top line, SEK124. 100 and 24. Looking at the different segments. As you know, we disclose the Nordics and the non Nordics, Nordics being the mature older countries with bigger customer bases. And the non Nordics are typically the ones that are still in development mode and where we haven't been that long time. So coming up from a big negative contribution margin to a way much lower, roughly down to minus 26% contribution margin with the new mustard and minus 50% with the old one compared to about 100 a year ago. So we're definitely moving in the right direction when it comes to profitability. We can also see that the ARPU in the non Nordic countries are increasing, while we have seen a decrease in the Nordic countries, as we talked about before. The main reason to the decreasing ARPU in the Nordics was 2 fold. One is that we had a bigger blend of family subscription, which is something great. Family subscribers tend to stay longer, which means that they give us a higher customer lifetime value. And the other change was or is actually that we have a significant business in Norway and their currency has taken a big hit from the consequences of not only corona, but also the decrease in oil price. So you know all this. So that took a couple of krona from our ARPU in the Nordics as well. Our consolidated ARPU is decreasing due to these two factors, but also the fact that we grow quicker in non Nordic countries with a lower ARPU than we do in the Nordic more mature country. But this is what we see. Glancing into the future, you see that we have a column with forecast for Q2 2020. So I think I need to mention, we now stretch the bar a bit and say we should reach 1 point 25,000,000 subscribers, 1,250,000 subscribers by the end of the second quarter, which is the growth up 96,000 subscribers almost in that quarter. The revenues will increase then as well up to 458,000,000. Euros The ARPU is stable in the Nordic countries, we believe, in Q2 and so as well in the non Nordic countries, the demand will be decreased, I think, because we are quicker in the non Nordic countries here as well. So fairly stable outlook for Q2 as well. Worth mentioning, and I will probably do that a couple of times on this call, the uncertainty is greater than ever based on the all the turmoil in the market. From our perspective, it's more difficult than ever to make a forecast for Q2 and also give guidance for the year and coming years as well. So next slide, please. I hand over to you, Ingrid. Thank you. So looking at backwards on Q1. And of course, it's important to mention the world has been in a different place during this time. And since we are operating in 20 countries across the globe, we have seen the effects of the coronavirus spreading earlier than, of course, Central Europe has done since we are operating also in Singapore and South Korea. So very early on, the first and foremost important thing for us has been to ensure the health of our staff and employees. So that has been the focus for us throughout this whole situation. We have been working from home for a long time, and some countries longer than others. And of course, been looking at the different local restrictions and comply with those. 2nd, of course, is to ensure that our operations have been ongoing. And we're very happy to say that it has been working very well for us. We are used to working digitally and online and being on video conferences since we have always applied a very climate friendly travel policy within the Storey Pan Group. So that came up as something easy for us to continue to implement while working from coal. 2nd of all, of course, for us, production of audiobooks is very important. And we, of course, want our customers to engage in books and, of course, new books as well and recent books. So we're happy to say that we have found creative and alternative ways to continue with production even though for some time, it will slow down for a while. But working with different digital health, we've actually managed to do home recording and a remote production assistance and after production. Then turning to maybe the more important thing, I think our mission, Storetail's mission to make sure that the world becomes even better with sharing stories and that they can be shared for anyone, anywhere and anyhow. This has come in effect even more during this past month and of course, already starting in Q1. So more and more customers have actually turned to storytelling. And we have a bigger base of trial customer than we have ever had before. This is due to 2 factors, of course, a large pool in the market. And secondly, also that we have offered, we thought that was also a good way to offer something back to the community. So we have offered our service for free for 3 days in several countries, whereas our normal trial period is only 14 days. We have also put an emphasis on lots of different community efforts and storytelling activities, everything from mindful curation of our content to, of course, author readings, engaging with their customer base or readers and listeners and also some local community collaboration and to ensure that we take part in the better world that we're trying to create. Last but not least, we have actually seen some changes in patterns on how people consume. And this is, of course, related to different type of behaviors that some countries have been under quarantine and working from home changes behavior on how you commute, etcetera. But we've also seen some other impact on what people raised during this period. Next slide, please. So I mentioned the reduced commuting spikes. So typically, our service, which we showed on the Capital Markets Day in January, people consume on a weekly basis our service, mostly in the morning and afternoon when they commute back and forth to work, as well as the night is a prime time for us, which is also a prime time for any type of media consumption. And this has been something we have been smoothing out a little bit during the day, even though nighttime has been, of course, a big spike continuously for us as I think people turn to our service for comfort and distraction and campaign. Crime thriller and also fiction keeps on being a very highly consumed segment for us or genres, but we have seen children category rise a lot. And we're very happy to see that the kids mode, which we implemented in 2018, which is a secure way to look at your storytel app for kids so that they only can see children content. And that Kids' Mod has actually been used more and more as parents have found it to be very helpful to have their kids read and listen to books on our survey. Last but not least, I want to mention that we have also been able to do some very innovative stories and podcasts during this period. It started already early in Italy, in Milan, where a very famous actress wanted to really talk about what people are going to during lockdown and quarantine. So we started to publish stories actually produced and recorded from people's home. And when's the different type of people with different work environment. So a teacher, somebody working in business, a production person, etcetera, so that we've got a wide perspective of how people were living and coping during these times and also have that as seen. This is spread across the Storytel Group and as we like to share, of course, ideas and thoughts around the group. So we've done a similar story for the whole Spanish speaking world, where we've used people and narrators for different types of dialects in Spanish also to make it very relevant and close to our customers. Next slide, please. Publishing houses. When it comes to the 1st Q1, we've had a good quarter for our publishing houses. But it's needless to say that, of course, the corona situation has also lately had an impact on the publishing industry as a total. And we see that the digital transformation is getting acceleration in terms of how people want to consume and listen and find relevant stories and books. So we believe that our publishing houses are well positioned since we are working closely with one another in order to capitalize also on the digitization of the publishing work. We have also had some celebrations. Anna Jonsson had her 20th birthday for Marillavann, which is a popular thriller series in Sweden, as well as Rangaschaffer as well as NNA WH, which belongs to our publishing houses, Wasser. So I think we have had a nice quarter for the 1st part of the year and need to look into how we continuously drive the digitization and ensure that we keep on doing the right efforts for the industry. Yes. I mean, we get some questions about the publishing houses and how are these functioning in these difficult times. And definitely, the physical sales have come down. You've seen that in all public reports. But remember that the Swedish market is up to 50% consumed by digital when it comes to fixed end books. So we are well prepared for this shift and unless maybe affected that you could expect when thinking about it in the first half. And also the Q1, as you mentioned, Ingrid, they show really good numbers, better than expected sometimes. But as you say, it will most probably be worse over the year. But I think we are in a very good position to handle that. Next page, please. So as we looked a bit about before, the forecast for Q2. So here, you have the numbers in percent as well. The subscriber growth is then up 40%, very good number and higher than the yearly guidance. And the revenue growth is up 43%. We had to put in a little box there saying that we definitely see great uncertainty in forecasting How should we how would these new users behave? We don't know. But at least it's really good that we get a lot of new people trying our service, and we believe many of them will stay even after this period. So really good growth that we foresee in Q2. Next slide, please. Looking at the financial targets. So these numbers, most of them, you have seen many times before if you follow the company. So our 2020 target is still the same. We believe we will reach 1,500,000 paying subscribers, which will be a 36% growth. And you can say, well, how can you be so sure? We are by no means sure. But we can say in the numbers that we've seen so far, we have seen no evidence that we should change it either up or down. So that's why we keep it. Looking at the revenues, it's the same argumentation. We really don't see any reason to change it. So we keep the same target for the full year. When it comes to our guidance on EBITDA margin, we had to make a change, and that is because we changed the accounting principles. So we used to guide negative 10% to 12%. And since we had a difference in EBITDA margin looking at the Q1 of 9.3%. When looking at the old and new method, we simply changed target to minus 1 to minus 5. A bit larger target, as you can see, and I blame the corona situation for that downturn is simply higher. So no change in this target either really. And we say for the year, we should reach stream profitability on a level in an additional 2 to 4 markets we've already in 5 markets, including the Netherlands that we turned profitable in January this year, and we should launch in 1 to 3 markets. Yet again, we believe we should be able to keep that even at least times for this year. So really no change here, which I personally think is a sign of strength. Looking at the long time target, you know these numbers. We think we should grow at least 40% on paying subs and 30% 35% in revenue. And the hard target here would be the revenue. And then depending on the ARPU levels and where they come, it might be more paying such that needs to be taken into consideration. And we will continue to prioritize growth before profitability, while keeping a close eye on our customer lifetime value through SAC so that we bring in new customers that actually add value to the company. On a local level, on a country level, we say in 5 years, in every country we enter, we should reach profitability in that market. And we have done that in many markets so far. And we should also launch in 20 more markets over this period, taking us to 40 plus market in 2023. So no big change except for the EBITDA target here. Next page, and that's where we open up for any questions from the group. Our first question comes from the line of Derek Le Labonte from ABG. ABG. First off, you mentioned that already in your trading update that you had an unprecedented subs intake in the latter part of March. And I was saying also that trial base is 3x normal levels. How have can you say anything on how conversions from trials have looked compared to normal levels there and what you're seeing? Thank you, Derek. Yes, we are, of course, looking at this very closely, and we can see that we don't see any real differences in conversion levels so far. I think it's important also to note to say that one of the effects from the changing 14 days to 30 days in some of our markets actually evidently means a higher trial base for us since they are converting later. So there's a time effect also in that number. Thank you. That's very clear. And then secondly, regarding the whole COVID-nineteen situation, I was wondering if you could say anything on how this is affecting production costs and the availability to do even better quality there with perhaps more people involved in that business being available and also what you're seeing in terms of advertising spots and costs. I mean, clearly, this is affecting the dynamics of supply and demand in all sorts of areas. So I think any flavor on those two elements would be helpful. Yes. Jurgen Herr can start off with the production side. We will and haven't seen any big change in production costs, at least no increase. We had I mean, we are a truly digital company, so we had the tools in place to actually do the recordings remote and we can mix it and handle it. We have recording studios in the homes of our mostly used narrators in many markets. So even though there was a short effect in the beginning, we are up and running in most countries with the green light on our KPI dashboard that we use internally to see where we are still producing. So it's a big downturn in that sense. When we look at the narrator scene, many more narrators have become available. They where they usually make their money in theaters or motor recordings or whatever that is, have been canceled. So they are available, and we are a good source of revenue for them. And of course, we take the opportunity to get good names to record our books in these times. That's a good commercial effect for us, but also feels good to be able to contribute to parts of the society with that. Turning with on advertising cost, Maybe you want to take that? Yes. So on advertising cost, I think that you are aware of that many media companies are are We have actually done quite the opposite. We have felt that we should continue to be present in marketing and also continued to invest. And hence, also that's, of course, why we have also reached more people during this time. So it's been both a word-of-mouth effect but also a marketing effect. When it comes to costs, I think that it's difficult for me to say exactly the level. But it's a supply and demand business as many other businesses. So I think we have been able to have actually on the margin lower costs for our marketing in terms of CPA costs. Maybe worth mentioning as well, it's probably obvious, but we have a shift in marketing spend as well, where, I mean, we don't get much from outdoor in the States. But it's more online marketing as such. I actually had a call from a very concerned shareholder that went to Garden Mowen in Norway and saw that our ads were still up there 2 months into the COVID. But the truth is that they were just left there. We're not paying for them as I could insure the concerned shareholders. Thank you very much for that flavor and clarity. Then finally, I know you don't always comment individual markets, but is there any markets or regions worth highlighting here from either a positive or a negative standpoint for the current quarter? Yes. It's very good that you know that we're not commenting on any individual market. But I can say that the larger effect on intake that we have seen has been fairly correlated to markets who have been very strict on their lockdown. So I think that's more a general statement. Cool. Okay. Thank you. That's all for me. And the next question comes from the line of Jorgen Brunel from DNB Markets. Please go ahead. Thank you very much. So three questions from me. Starting off, I mean, understanding that it's very difficult to predict what's going to happen. But I'm curious if you could share anything that you look at as sort of, say, key indicators as you try to plan for the business for 2020 And how those indicators have changed from, say, the CMB to where we are today? Yes. I think it's a bit hard to say that every outlook that we did, both for the full year and for the long term, we keep them. We keep our targets. We really don't see any firm evidence that we should change any of them. So in all the actuals, it's looking good and we have the same KPIs, I would say. However, pointing out again, the uncertainty is great. And who knows what will happen in Q3 and Q4 this year to the economy in big. And that is the big question mark for us. So really no big change as such. All right. Okay. So the contribution margin step up from minus 90 4% to minus 50% in non Nordic streaming. I mean, it's nothing but impressive here. But can you comment a bit on what drove this improvement and whether it's sustainable, etcetera? Yes. Thank you for asking. I mean, looking at the long term trend, you can see that we have been improving this significantly quarter on quarter for quite some time now. So I believe it is a sustainable trend definitely. Also, the main drive to this is the big growth in subs and in revenue in these markets. So when we start up the market, we need a number of subs. We also need to record, in many cases, many audiobooks and a big production engine for that. Over time, with growing revenues, that margin will seem to be better. That's math. So I would say I would dare say that it is just sustainable for the future. That's clear. And yes, finally, as you more or less reiterated your 2020 guidance here, does it contemplate any meaningful new market launches? Or have you revised the plans for that? Our plan to launch market for the year is the same. We said 1 to 3, and that is what we will deliver on. So no change as such. I would say that work, exploring new markets is progressing according to plan. And I mean the only uncertainty there is that we have a plan in place and that something fundamentally happens in the world that makes one of these countries that are in the plan not being able to launch basically. But we don't see that those factors are here right now as we can see. All right. Thank you, Ingrid and Jurgen. Thank you. And the next question comes from the line of Jarmo Alberg from Kepler Cheuvreux. Please go ahead. Thank you. Maybe a question. You touched a bit up on publishing business. And I mean, you have acquired some publishing units historically. Do you see this as an opportunity to, I mean, increase your own publishing units if others are struggling? Yes. I mean, generally, we cannot comment on potential acquisitions at all and neither for the publishing houses. But looking at the market, I would foresee that there will be opportunities coming up under these difficult times. And as you know, we have the cash in the bank to be able to use any of these opportunities coming up. So I think that's the only thing I will do in commenting on that. Okay. But would you say it's then if you move into new markets, would you say it's important to have more own content? Or it doesn't work well to buy content in new markets as well? I mean, it depends on the market. There are very different. You could access a market where there are hardly any recorded audiobooks, then you simply have to record them. And you can enter other markets where there is a great variety of audiobooks, then I would say it's easier to simply license them from someone else. That's what we do. But we are able to work in both instances. Generally, before we acquire publishing houses, we usually historically have waited until we have a volume in the market for that, which is easier to bring the investment back doing that. But that's just pointing out how we exit historically. Okay. All right. And then a question on non seasonality. Historically, Q3 has been the quarter where you have the strongest of our growth. Now we're changing a bit maybe with more non Nordics. But do you see any change of that during this year? Or do you think that will be the same? I understand it's more difficult than usual talk about this, but just if you see any change there? Yes. It's, of course, more difficult than any time to predict such behavior. But as you pointed out yourself, Nordics has traditionally been a very seasonal market as we have longer periods of time where people go on holiday and tend to actually consume more books and stories during that time. As we have entered many of the other markets outside Nordic, there is no such vacation behavior as well as seasonality vacation behavior. So we are offsetting that as we are growing more and more into other countries. When it comes to the coronavirus, I would say that in a way, you can see that as a seasonality effect because, of course, this has been something that every country in the world has been seeing. And so people have stayed at home more. They have turned to other things to find comfort or just reduce anxiety or feel less lonely and sometimes also escaping with a really, really good book. So I think this is a seasonality effect, of course, if you would try to extrapolate that. Got it. And the last one on the new capitalization impact. Guess you can't guide on future, but would you say this level that we saw in Q1, will that do you see that being a very volatile number or something that will have a close correlation to sales when you grow, if you can say anything about that? No. As you said, we haven't guided about that. And it's honestly difficult to forecast as well even for us. But I don't see Q1 stand out in any way. So it should be a good proxy for coming quarters as well. Our next question comes from the line of Oskar Ejsson from Carnegie. Go ahead. Thank you. Good morning, guys. A few questions from me. First of all, regarding your subscriber forecast for Q2, you talked about the uncertainty here a bit. But for the forecast, are you assuming your normal retention rates and user behavior? Or have you taken a more sort of conservative approach? I would say, I mean, yes, what is the usual is something you need to ask yourself. So we are looking at the data. We are analyzing in detail. We know how they came to us and when the trial period ends. We're using the same pair of glasses, I would say. But as we've said many times, the uncertainty with the new ones coming on board in greater amounts, which we don't know. But we try to make a reasonable estimation, not being too much on the safe side, but definitely not very aggressive either. So I would say balanced way of doing it using the same tools that we always use when doing the forecast. Got it. Very good. And my second question on the quite resilient performance of Print Publishing in Q1, given the situation with fiscal retail being down quite a bit. Could you elaborate a bit on the performance and perhaps how the revenue mix shift has been between digital and physical channels, e commerce and physical retail. And it also follow-up there, if Q2 would see larger negative impacts or smaller? Thank you. So looking at Q1, we need to remember that the lockdown effect came mid Q1 and the print publishing business is mainly driven by preorders that are put in beforehand, which means that for the print publishing business, revenue is hardly affected at all. I would even say unaffected by the COVID situation. That will come up later. I will not guide on anything coming to our publishing houses on the future, But just saying that the market overall is definitely down. We see that. And I believe we are good owners to the company in these times because we are so digital as we are. And as I mentioned in the beginning, the Swedish market being where we have the biggest publishing house, 50% of the total consumption of books is digital books, which means that we are well prepared to handle a downfall in the market as well. Got it. That's it for me. Thank you very much. Thank you, Oscar. Thank you. And as there are no further questions, I'll hand it back to the speakers. Great. Thank you so much for listening to us, and thank you for the great and insightful questions from you guys. Looking forward to talking to you in the quarter's time again. Take care. Yes. Thank you so much. Stay safe.