Earnings Call: Q4 2019

Feb 20, 2020

Thank you very much. Yes, this is Jonas Telander, CEO and Founder of Storytel. And with me on this call, I have our Interim CFO, Jurgen Groldansen and our CCO Chief Commercial Officer, Ingrid Boiner. So if you go to the next slide, we can see that we have a very, very strong revenue growth. It's 45% now in Q4 2019 compared to Q4 2018. I mean this is most of this is driven from the Nordic market. I think 38% of this is from the Nordic market and 7% from the non Nordic market. And the subscriber growth drives a lot of this, but then also we have an ARPU improvement that has really boosted revenues. So this is a high really high number for us. Next slide, please. If you look at the other highlights in the report, I mean, again, the leading targets for us is subscriber growth and revenue growth for our streaming business, and that's looking very, very strong now. And then we can see that the contribution margin is also moving upwards to 14%, now up from 10% a year ago. And EBITA margin, we have communicated a range of minus 14% to 16% for 2019, already early last year, and then we corrected that range to 16 minus 16% in the Q3 report, and now we ended the year on minus 15.7%. So that's all in line, and the Q4 was even a little bit better than that. And then we also refinanced our bank loans and extended the credits at Swedbank during the quarter, which we're very happy about. So I now hand over to to talk about the details of these numbers. Thank you, Jonas. Next slide, please. So looking at the details of the report. You can see it's a beautiful development quarter on quarter for the last 5 quarters. As Jonas said, the revenue came in at 421,000,000 up from the €299,000,000 a year ago. Good development, but even better when you look at the contribution profit at almost €69,000,000 which is almost doubling the contribution profit we had a year ago. With the growth in revenue, you don't get a doubling of the contribution margin, but it's up to 14% compared to 10.4% a year ago. The paying subscribers, you see that, and we have communicated that before as well, €1,083,000,000 as an average for the quarter, and we reached $1,100,000, as you know, on Christmas Day. At ARPA development, you can definitely, in the numbers and in the graph, see the positive improvement coming from the VAT decrease in Q3 2019. We maintained at higher levels for Q4 2019 as well, coming in on a group level of 130 krona per year. If you break it down and look into the segments that we present, the Nordic countries, the bigger and the more profitable regions, you can see that we come in at €353,000,000 compared to the €259,000,000 also a good contribution profit. This is where we make the money and a margin of almost 33%. I believe we can say it's the highest we've seen in the world. This was also for the ARPU, SEK 155 in the Nordic countries, which I believe is an all time high. Looking at the non Nordic countries, the ones that grow a bit quicker than the say, mature markets in the Nordic, but more mature markets, I believe, where we saw a doubling in the revenue from Q4 last year until Q4 this year. The contribution profit is a negative one because this is where we invest in many newly started markets. But however, the contribution the negative contribution profit is on the same level as it was a year ago, which means that the margin is much, much better, half the loss that we did last year. Also great to see that we have a customer base in the non order countries now up to 326 1,000. It's a big number. It's really growing and becoming substantial in the group. Looking at the ARPA as well. The offering in these countries are lower, as you know. And it is great to see that actually the ARPU is increasing over time and that the price increases that we do and continue to do actually do have an effect. The our guidance for the Q1. The forecast near for this report, as you might have seen, we believe we will continue to grow our revenues to €438,000,000 in Q1. The good development here is when you compare it to Q1, Q4 last year's shift, we had almost no growth on the group level on the €4,000,000 globe because in Q1, it's usually a weaker quarter. However, this year, we definitely think that we'll grow another €17,000,000 So it's a positive shift, and we have a good speed in the group. This growth in Moneywise comes mainly from the non order countries, where you see the more substantial growth. Positive as well to see the increasing ARPU levels that we foresee, get and expect for Q1 in the non ordered countries of SEK 3, mainly driven by the price increases that were done in Q4 and also done in Q1 2020. Next slide, please. Yes. And if you summarize the guidance that told you about, that adds up to 48% annual revenue growth for Q1 and 38% subscriber growth. So that's extremely strong. It's not something we expect to keep throughout the year. We expect still to land closer to the 35% guidance we have. And the reason we are currently very high is the substantial VAT decreases or reductions that we saw in Q3 last year. But again, a very, very strong guidance, and we're very proud of that. So let's take a look at the other financial targets and how that develops over time on the next slide. Thank you, Jonas. So just looking back to the financial targets we had for 2019, and I'm pleased to say that we delivered on all of them, reaching the 1,100,000 subscribers as we did on Christmas Day. The revenues are in line, euros as well, and the even though negative EBITDA came in below what we guided at 16%, we came in at 16.7%. Also worth noting that Q4 was actually 14.6 so better than the yearly average. We did reach 2,000,000 in profitability on more than 1 market, and we did our launches, as Tim will tell you about. So looking at the target for 2020. What we know now and the target we did for Q1 does not make us really say that. We believe in it. So these are the same numbers we've seen before. We should reach our €1,500,000,000 tonnes. We should reach between CHF 1,900,000,000 CHF 2,000,000,000 in revenue. The EBITDA margin will improve from the minus 15.7 percent off, so between 10 12 megabits versus using same accounting methods as we've done in past release, like for like numbers. And we'll also show reach profitability in at least 2 markets, maybe 4, and launch in at least 1, maybe 3 markets. Our long term plan is also the same as we've done before. So we believe we will reach 40% on paying subs at least, 35% in revenue, and we'll do this with still good KPIs, customer spend value versus oxygen costs and launch in another 20 markets. Next slide, please. Okay. So how are we going to reach our targets? We look primarily at the Suezneslosak calculation. And what are we doing then on the ability to reach the guidance that we have put forward? Well, we're going to do a heavy improvement on the gross profit continuously with 4 markets having increased prices during January February, and we have also been helped by a recent reduction in VAT in both Holland and Germany starting this year. The tech team and department, combined with the customer team, are working towards the long term value for the customers in terms of lifetime with large improvements on the feature side and that are coming out during the year. So we hope to improve also the sales that way. Then not least, we have the SAC development, which is a continuous improvement and optimization of our marketing efforts. Next slide, please. And then looking at what we did last year in terms of new market launches. We launched 5 markets compared to 2018 when we launched 6 markets. And we are projecting to launch the 20 markets during the next coming 3 years. Next slide, please. So if we look at historic launches of different countries, we can see that over time, we reach profitability. And this is a combination, of course, by a scale effect in the market as well as improvements and the virality effect in the customer side and also improvements on the lifetime of customers that keep on staying with us and our service. So looking forward, we have Poland, Finland and Russia that are markets that we are seeing that we are going for profitability for this year and the next year. And so we have had a guidance of 1 to 3 more profitable markets for this year. Yes? Very exciting. Thank you, Ingrid. Go to the next slide, please. So looking at market opportunity for Storytel, we are very bullish. We see that the audio revolution and audio trend continues to be incredibly strong and helpful for us. The coming 10 years, we expect the overall audiobook market in the world to grow by 15% annually, and Storetel should be able to take a good market share on that growing market. We currently have a market share of 5% globally, but if you look at the non the having StoreyTel capturing a 15% to 20% share of that market growth. So this looks for a bright future. We do hard work every day to make sure that we have people loving, enjoying audiobooks around the world and hope to be doing that for many, many years to come. So next slide, that's it for our presentation, and we'll now move over to a Q and A. Thank you. The first question comes from the line of Derek Laliberte from ABG. Please go ahead. Yes, good morning and congratulations on a strong end to 2019 and also a very good start to 2020. My first question, I was wondering if you could give some more details around the factors affecting the positive development in the contribution margin in the quarter in the Nordics. If you could break it down on how the market share of Listens has developed as well as the reduced VAT effects from that and marketing spend. Thanks. Yes. So thank you, Tarek. I think you are correct. I mean, the contribution margin improvements come from I mean, one part of it is, of course, the price increase or implicit price increases that came from the VAT reductions in Q3. And then we've seen some improvement also on the gross margin and the content cost driving from a better product mix and a better profitability on some of our accounts. And then we've seen also that in the summer season of Q3, our marketing costs are very, very high, and then they dropped down a bit in Q4. So it's natural to see a little bit lower market discount in Q4. But overall, very positive and also comparing to last year, very, very positive. Okay. And then secondly, individual Nordic markets are performing? Sort of how does it look around Sweden, Norway, Finland and Denmark and Iceland? Yes. I think I will start with Denmark. As we presented last year, we did a consolidation of our platforms that we have in Denmark with the Motiflo being our strongest brand and also our platform change towards the storage and tech platform. So we are continuing to have a strong result in our Danish market, and we see here continued strong development in the Icelandic market. As you can see, that is a recent market we've launched, but it's already a profitable market to us. So I would say that we have a strong performance across the whole Nordic group. Okay. Thank you very much. And finally, from Middleton, more on a general note here, what would you say are like the biggest risks to this long term financial targets that you have? Is it related mainly to competition, the competition landscape or being able to access content in the same way as now or more of a general audio book penetration, sort of where that will help? Thank you. I mean, I think if you look really long term, we see, I mean, mostly opportunities in the sense that we are heavily weighted towards the audio consumption and audio evolution. But in that space, there's also competition. I mean, you have podcast platforms growing stronger and stronger and a lot of the creative talent being invested into those the contents of those platforms. I think that for the book industry in general, it's important to stay relevant and focused on the top talent, creative top talent, which always have come to the book industry, but it may not be a given that they continue to do that, but come go elsewhere to podcasting platforms. So for us, it's important to be also somehow present in that space, in the storytelling part of that space and make sure that we keep having a relevant content and good work. Okay. Thank you very much. It's very clear. The next question comes from the line of Oskar Eriksen from Carnegie. Please go ahead. Thank you and good morning, guys. First question is on Sweden. I know you discussed the Nordics more in general terms, but could you sort of describe a bit how subscriber growth is developing in Sweden given quite strong growth and increasing size of your local competitors? Yes. Thank you for that question. Yes, I mean, we continue to have a very strong market position in Sweden. There's been some statistics coming up for the Publishers Association and Booksellers Association, and we keep being a strong market leader with about twothree of the overall market. So I think that's very positive. We see also that the book market is now really pivoting from a physical market into a digital market, in particular, in the adult fiction segment. So the growth there is underlying subscriber growth still in Sweden for Soetel. It's a double digit growth still, and we're hoping to keep it that way. But need to stay very relevant and focused to make that happen also. So I think Ingrid has some other thoughts on this. Yes. So I think we had actually reached a very important milestone during the fall with the 400,000 subscribers in the Swedish market. So we continue to see positive growth, and we know it's a more competitive market that we have. But we have a strong presence, and we continue to work with our content to develop it at continuous pace. Great. And 2 other market related questions. Can you discuss how the launch has been in Germany, which is quite a particular market, I guess. And also just very quickly describe what markets are performing the best outside of the Nordics? Is it still Turkey, Mexico, those that have performed well previously? Yes. I mean, we don't normally comment too much on the details of all our markets. But with regard to Germany, I think it's a similar stage to South Korea that we're building up the markets right now in the content offering and preparing for a bigger rollout, but we haven't really gotten to that big marketing spend time point yet. And in terms of the best top performing market, maybe Ingrid could share some interesting flavor on that. Yes. I think, as we also wrote in our yearly report, it's all about the local product market that we continuously work on. For us, it's very important to start with the content, making sure that we have something that's relevant for the local customers and then parring that with the payment system that works best in their countries. And then when we start exploring our marketing opportunities, we can see that in some countries, as we also spoke about on the Capital Markets Day, the way people consume our product is very local. And secondly, they may differ a little bit between markets. So for example, in Russia and Turkey that we spoke about on the Capital Markets Day, there's a heavy shift towards really wanting to learn something from listening to books and audiobooks. So that's something also we then work with on a local level and to part the content on the best way. And this is how we work with every market that we go into. And I think we will not be able to comment even more deeply, but yes. Yes. But Jan, you should basically look to our more I mean, the markets we that we are in profitability on or expect to come into profitability on, and those are the locomotives for most of our top line growth in the coming year. Great. Very clear. And a final question, I'll leave it. But a final question, Penguin Random House, you discussed a bit before at the CND, but obviously, they withdrew their its Anglophone and Spanish content from unlimited streaming services. Do you consider English content important in market launches specifically? Or do you see it as a nonevent? Would be great with some more insight there. Yes, great question. I mean, Penguin Random House, yes, they withdraw from all the streaming services globally here a month ago. And to us, for their English content catalog, it's very small impact and effect on the consumption because 85% of the consumption is local language and only 10% to 15% is English language and paying a random house is a small subset of the English part. So it doesn't really have a huge But in the Spanish region, of course, they have a strong position. And a lot of the content that's being consumed there, it's from one of their publishers. So I think the just like with Netflix 6 or 7 years ago, when you some of the major labels withdrawing from their service, you saw them investing more heavily into their own content catalog. I think that's kind of where you're pushed as a streaming company to go in terms of investing more. So we'll see more investments in total original content in the Spanish region going forward. The next question comes from the line of Jarmar Alberg from Kepler Cheuvreux. Maybe a follow-up on you discussed the local content being active. Again, when launching in the market and being successful, how do you see competition developing? Are they trying to replicate this? So in it or is it difficult to do that? Yes. Thank you. I think having a strong position and a strong brand name also in the publishing industry is something really good for us. And also owning publishing houses, that makes us relevant and trustworthy as a partner for building app content locally. I don't want to comment exactly on how the competition is thinking, but I can clearly see that we are the most local streaming service when it comes to audio. And this is a road that we believe is the right road to go. Okay. And you mentioned publishing there. We had a quite good quarter. From my perspective, what was driving the growth and margin there? And was there something I mean, I know Q4 is also a strong quarter, but do you think the pickup in growth and contribution margin was something sustainable looking into 2020 and beyond? You mean you referred to our publishing houses and the same yes. No, I mean, that's typically what you see is the seasonality effect of the Christmas season, which is always very strong in that area. It used to be stronger. It's more leveling out now. But overall, I think the growth that we see in print publishing is more driven by a couple of acquisitions we made where we moved in 1st Maseloot and Bewald Strandstrand print publishing into the Nordstapp publishing house, which is largely driving that growth. But otherwise, I think the I mean, the book markets in both Sweden, Denmark and Finland are largely flat or single digit, low single digit growth. Okay. And the last question on the ARPU levels in your forecast. You're seeing it coming down a bit in the Nordics and coming up a bit in the non Nordics. Can you give some more flavor that's just mix between countries or something else driving that? Yes. Starting with the positive news. Looking at the increasing revenue in the non ordered countries, that's mainly driven by the price increases that we do ourselves. As we see, there's the growing catalogs there in the countries who dare to increase the prices and the customers stay. Also, in some markets, we've seen VAT rates going down, like we mentioned in Germany and the Netherlands, which also impacts this positively. So that's good news. Looking at the Nordic market, I mean, we were impacted partly by, I mean, rebuild per day, and we had actually one day less in Q1 than we had in Q4, which affected by €1.50 So that's one impact into this one. And the remaining part is, I mean, it will be a mix of the countries coming into this one. And also, I think the family, there's been more family accounts being signed up, which are at a lower ARPU. So that drives ARPU slightly. While being very positive when you look into the customer lifetime value because the family subscription models, the lower ARPU, brings in more money for payers and also makes the customers stay for longer time. Okay. Perfect. That was all from me. Thank you. The next question comes from the line of Gorham Gunnell from DNB. Please go ahead. Thank you. Good morning. So I came in a bit late here to the call. But if you touch upon this, perhaps you could clarify once again. I noticed price hikes in both Russia and Turkey since the CMD. I think you already mentioned Poland and Mexico back then. So perhaps you can talk a bit about the timing of these hikes. How much is driven by, say, inflation versus markets becoming more mature and your ambition basically to improve customer lifetime value? And then the follow-up would obviously be if you have seen any impact on churn. Thank you. Yes, any pricing decision is a combination of different factors. But we start by the customer side and make sure that we have a catalog that we have really put money into and invested in. And then we feel that it's time for a price increase. When it comes to Turkey, yes, you may also think about the inflation being, of course, a part in this scale. So it's a combination of factors. You asked about the churn, and we have actually not seen any real effect on the churn side. We have, for some of these markets, introduced price to new subscribers, and we can continue to see that we see a good growth. And we also have then kept a lower price for our remaining customers for a while. So that's a nice way of introducing a price increase to the market and also taking care of the customers we already have. The grandfathering principle that not fixes you for many, many years is what English refers to? Sure. So I mean the regions where you seem to accelerate your international expansion seems to be, I mean, further down the line, Latin America and perhaps Middle East, given the scalability of the content catalog. But I mean, your push into Latin seems to be paying off in terms of, I mean, popularity in terms of your app, but not so much in, say, the United Arab Emirates. So any thoughts on why that is? I think we found the local product market fit, I think, it speaks about in Mexico and also looking feeling very bullish about the rest of the LatAm region. I think we haven't quite found that yet in Arabic. In India, it's also taken up some time, but we expect to solve that this year by introducing a new type of subscription for the Indian customer. So step by step, we try to solve this phase of this market. And our approach to United Arab Emirates, we have also invested heavily in our catalog there. So that's also what we have really decided to do. So the marketing hasn't really been the focus for us yet. It was also positive to see that we have now introduced the Arabic concept in our Nordic apps in Sweden. All right. And for then, so as 2020 will be somewhat of a consolidation year with somewhat fewer markets launched. Can you talk about, I mean, cash flows going into 2020, say, versus 2019 levels? Yes. Consolidation year, yes, in a way. We will continue to grow by 35%, as you know. So it's consolidation in the historical way. So we haven't guided to detail on this one, but with the growth, we will continue to lose money. That is for sure. And as you can see in the report, we have kind of cash, and we have additional credit lines available with Sleddijk as well. So I think we are in a good position to support this growth for the coming years. Great. Do we have any final question? Or do you want to close the call? A final question? One final question just there. Could you perhaps yes, when will you provide further details on the financial implications of the eventual capitalization of content and development costs? Oh, yes. This will come during this year. We haven't set an excess date, but sometime during this year, we will start to capitalize those assets as well. So you will see it in 1 of the quarters here in 2020. That's what we're promised. Thank you very much. So final, final question then. We have a last question from Dennis Bergren from Pareto Securities. Please go ahead. Okay, good morning. Just a quick question. Could you provide some color on the story offering and how it's currently, I think, customer lifetime trends specifically, Sharon? We don't have any data on that at hand. We I mean, basically, last summer, we introduced STORY, the magazine subscription, to our subscribers. And we had a good sign up and then a good conversion in October as people started to pay for that subscription. It costs SEK 50 on top of your SOREL subscription. But we only have like 4 months so far. So we don't have any firm data that can validate the improvement on the survival rate on the customer lifetime for the customers to sign up for that. So we need to get back to that in the next quarter. Okay. Perfect. Looking forward to that. Yes. So thank you very much, everybody. Excellent questions, and looking forward to talk to you again in 3 months from now. Until then, stay tuned, listen to more audiobooks and stay as followers and investors in Storey Tel. Thank you very much. Thank you.