Earnings Call: Q3 2020

Nov 10, 2020

And good morning, everybody. So we're going to go through the Q3 2020 report. And with me, I'm Jonas Helland, the CEO and Founder of Storytel. And on my side, I have our CFO Interim CFO, Jorgen Gullbensson and our Chief Commercial Officer, Ingrid Boiner. Good morning, everyone. Good morning. So let's flip to the next slide. And we have the subscriber growth of 35%, up from the year ago quarter and revenue growth 23%, revenue streaming revenue 23% up from the year ago. Next slide. And this amounts to SEK609,000,000 in total turnover for the Q3 quarter. We also made during the quarter a number of acquisitions, no less than 4. We go through them in a bit later. But first, I'll hand over to Jorgen to walk us through the next slide with all the numbers. Thank you, Jonas. So looking at all the numbers on Slide 4, you can see that we booked a revenue for the group for the streaming businesses of CHF 490,000,000 as we have reported before. Factory also to announce that we do the highest contribution profit ever of €113,000,000 almost €114,000,000 in the period. Contribution margin of 23% and some The great contribution profit and also the high revenue generates even a positive EBITDA margin in the quarter. Internally, we call it a small accident, but it's fun to see that when we after we started activating our audiobook production and also our tech development in the group, the EBITDA margins came up substantially. And in Q3, where we slightly lower marketing than usual. The contribution margin come up and we even could book a EBITDA profit for Q3. This is fun, but as we point out in the report, this is not the thing that you should expect happen regularly going forward. But somehow, it's an evidence of our business model anyhow. We saw the paying subs coming in at SEK1.36 million in the period and an ARPU of SEK120 million. This is good. This is driven by growth. When it comes to revenue, it comes mainly from the Nordic countries, where we are almost up at €400,000,000 in Q3, with a really good contribution profit there, €125,000,000 and a margin of 32%, now about 900,000 paying subs in the non order countries and with a healthy, ARPU of 146,000,000 as well. Almost even more fun is to look at the non order countries where we approached the €100,000,000 mark, €96,000,000 in Q3. Of course, having a slight negative contribution profit, but then we should remember that these are the markets that we really do invest in marketing and growth and staff and whatever we do in all these countries. So it's still happy to see these numbers, and we can see that the average paying subscribers for the period, they are then over 4 100 and 50,000 in the period. Delaware are occurring in the non Nordic countries, of course, because these are economies with lower purchasing power, but as you know from before. Check and look at the graphs. As you can see, they all point in the right direction, which they should, increasing and going upwards to the right. Also giving the forecast, as you saw for Q4, the last quarter of the year, coming in at almost €500,000,000 in revenue in Q4. A bit said that we put into record a size number before, but this is actually what our model projects. So let's keep it at 499.5. Also growing the subscriber base, this is what we foresee for Q4 with another 75,000 paying subs in this period. Taking a small hit on ARPU, which also, of course, affects the revenue, And this is driven by the fact that we have kind of you could say the good news. We have a very strong Swedish krona compared to our significant currencies, looking at the Nordic currencies like the Norwegian krona, Icelandic krona, but also compared to many of the weaker currencies like the Turkish lira, etcetera. So it's good for Sweden, but that's for the reporting numbers of Storozab. We also have another positive news in this one, and that is that we are successful in converting our existing users into ARPU because we divide the money that we get in with more people, but it still means that we get more money in, We get them more to stay on our service, which drives down the churn. So our LTV for these customers are positive, so happy to see that even so. Looking at the Nordic and non Nordics, we see almost similar growth rates. Of course, we grow most in the non Nordics countries where we see that we will add more than 60,000 people to the company, reaching 530 1,000 paying subs at the end of the year. And this is as far as we see it today based on the exchange rate that we have today. So let's hope for a weakening Swedish product. Okay. Next page, please. During the Q3, we completed a number of acquisitions, one being the acquisition of the Arabic streaming service Kitab Saudi. That's now been completed and those numbers are in. We have now a huge catalog of Arabic speaking audiobooks of close to 5,000 titles and are preparing to ramp up our marketing activities there in the coming quarters. We also completed the acquisition of Icos, the Israeli cleaning service on October 1, and we expect to launch this towards the end of Q1. And also here, we have a very strong Hebrew catalog that we hope will stand very strong next to also Russian catalog and to be able to launch that market in 2021. Then Nordsted Schwarzkrupp made a small acquisition of a literary publishing house, Brumberg, run by Borthea Brumberg. And this is, I think, very exciting for the publishing house. And then looking at expansion in it, what do we have there? Yes. We're happy to have announced that we will be expanding in Thailand in the next quarter or in this Q1. So in a couple of weeks, we will open up our service for the Thai public. And that's very exciting. That's also strengthening our presence in the Intact region where we're continuously expanding. And then October 28, we launched our service in Belgium. And that is extremely fun launch because we are actually doing it also from our Amsterdam office. So even though this is, of course, a localized service for the Belgium public, it's still an effort in combination with our people on the ground in Sweden and also on the ground in Netherlands. Cool. May I just add, because you went a little bit quicker in the beginning because during the quarter, we also entered into agreements to acquire a 70% majority interest in high frequency reading book publishing house, the lobby as well. It's not in the books yet because we are going through competition authority approval and our processes in Iceland. I hope to see that completed in Q4 or in worst case in Q1 2021. And we also acquired an 80% majority interest in Eero Select. It's a audiobook production company, Sweden based, but this business all over Nordic, which we think will be important to the company. Yes. Thank you. So all in all, in our Capital Markets Day, we announced that we were going to launch at least 1 to 3 countries. So Belgium and Thailand will be those countries to be on the target there. Next slide, please. So what about content? Well, even though the world has been in distress over this 2020 with corona and COVID virus affecting us all, I think creativity has not lost its purpose. And we are very happy that we've collaborated with 1 of the most renowned crime authors in Russia and released the Storyteler Regional for audio at first by Boris Akunin. So that's a great success, also coming after having done other storyteller originals in Russia. So that's something we'll continue to explore. Secondly, we have launched Harry Potter, both in Bulgaria and in the Netherlands. In the Netherlands, it's fun because it's a new recording, and it's really bringing people to our service and also bringing something really great to the people in the Netherlands. And thirdly, we wanted to highlight a very special recording that we have done together in collaboration with the Prins Karlsruel and Prinses Sussida Foundation on dyslexia. It's called ELSKeller Dyslexia, the Lave Dyslexia, which was also launched in combination with Gothenburg's bookshelf. Next slide, please. So other highlights during the quarter. We can also say that we have something we talked about in the Capital Markets Day about starting to make pilot protests with different types of subscription models. So we have done 2 of those pilots. And we have launched one select version in India, and it's a selected version of our unlimited offer, which is targeting only the Hamama Harafi language group, which is the region around Mumbai. And this is a less expensive service, which then can actually reach out to people who doesn't need also the English more expensive content catalog in the service. And that's actually gaining a really great momentum. And this is part of localizing our service, so it becomes even better and more suitable for each of the markets that we enter. And secondly, we have also launched another model, which is the Storytel Light in Finland just a couple of weeks ago, which is a limited version of our subscription model. You can get all the content, but you can only listen for 20 hours. And it's at a little less price. And this is for us to expand who can actually listen. And hopefully, we can reach even more consumers that wants to take the step into audiobooks and streaming, which we are very happy to have launched. And then we held a global conference this year, a virtual conference. Do you want us what did you what can we say about that? Yes. I mean, I think we agreed it was a huge success. We've made it a tradition to have conferences every year in early September, where we gather all the storytellers around the world. And obviously, this was not possible this year, but instead we went into a TV studio at FIM, so here in Stockholm and around 6, 45 minutes to 3 d shows internally, so to speak, over this 3 days in early September, had chat moderators and a lot of engagements from all the employees around the world and then other workshops. So what's that? I think 3 really packed days. Of course, you cannot mimic the physical socialness of actually meeting together. But I think we did a really good job. The outcome from it was a very positive rating from our 600 employees from this conference. So it was a good success and I think the best way we could handle the corona situation. And being a very diverse and dispersed company, this is obviously super important for us to make sure that we all know our targets and what we're aiming for and how we can continuously growing Storyteller worldwide. Good. So if we jump to the next slide, looking at the Q4, We're anticipating a subscriber growth over Q4 2019 of 32% and the revenue growth of 19% over Q4 in 2019. And worth to point out to you guys that read our reports and that the first one that we've done on this morning, we had slightly incorrect percentage number in that one. So the subscriber growth up there in 42 versus revenue growth of 25. That was not correct and is not corrected on the side and here. Numbers are correct, but the percentage is lifted it. Thank you to all analysts out there that found it and notified us quickly. So moving over to our financial targets, which we have the same slide here for quite some time now. And now we're coming to the end of 2020 and we have always said we're going to reach 1,500,000 paying subscribers and that would then be December 31. So comparing that to our forecast number of 1,435, as an average for the Q4 that we have in this report, we are still positive. But I think as Jonas pointed out earlier today, we might miss it with a week or 2, which is what we usually have done. I mean, some years we've been a week or 2 ahead, as you were last year on Christmas Day, and some of the years have been a bit late. But it's around the change of the year where we will reach our 1,500,000 euros There was a set we're going to grow our streaming revenues to 1,900,000,000. Originally when we started the year, we actually said 1,92,000,000 In this report, it says now we're going to reach €1,870,000,000 or something, I think it is. So it's some €20,000,000 short of that. Worth knowing then when we look at the numbers, if we would have used the same exchange rates that we had when we did this forecast in Q4 2019, we would have seen revenues coming in at above €1,940,000,000 so €1,941,000,000 which would have meant a growth of 35%. So if we allow ourselves to accuse the strongest Swedish chroma, we actually reach exactly the target we set up before the year started. So we're also saying we're going to have a full year negative EBITDA margin of minus 1% to minus 5%. We had a positive 1% this quarter in Q3, which is good because we're slightly sliding to the upper end of this range. So I'm happy that we are now within the range. So it looks positive for the year to reach this one as well. We're going to reach streaming profitability on local level in 2 to 4 markets. We have announced 1 this year with Netherlands. Let's hope we can add at least 1 more when this year ends. And we're going to launch a 1 to 3 markets, and that Ingrid already reported that we do for sure. Looking at our long year long term forecast, we said we're going to grow some 40% on paying subs. As we stated before, this is the less important target. And of course, the revenue is below the 35% category is the more important. Worth pointing out that, I mean, this is an average for the period. We could be above some years and we could be below some years. So we're not promising exactly 35% every year, but we think we're going to reach this on average for the planning period, as you all know. We're going to continue to prioritize growth before profitability. Like mentioning, when delivering positive EBITDA this quarter, we're still going to focus on growing this company as much as we can. And we're going to monitor it to make sure that we have this continued good development in customer life fund value versus SAC over the period. As long as we do that, we're going to try to test growth. And as we always say, we're going to reach stream profitability on a local level within 5 years from launch and that we still can deliver on. And launching another 20 plus markets over the planning period 2021 to 2023. This will go through for sure, I think, during this period. The next page, we then open up for questions from the group. Our first question comes from Joakim Guneau from DNB. Please go ahead. Thank you, operator, and good in the Storetell team. So a couple of questions for me. Let's start with. I mean, in conjunction with your Q3 streaming update, I personally got the impression that your non Nordic segment was growing at almost, say, 100% in August September since you commented earlier that July was basically flat. So now that we look into Q4, I mean, you forecast below 60%, no more likely subscriber growth. Is there something here that perhaps changed in your mindset that you are becoming more cautious on growth, given, let's say, almost 100% growth in August, is that pepper? I mean, to begin with, looking at percentages, it becomes harder and harder as we grow to grow with the high percentage numbers. But this year on the sound, of course, we believe we still had a good growth in Q4. I think we grew some 65,000 subs in the period, which is comparable to the I think we grew 47,000 between Q3 and Q4 2019. So actually up there. Then of course, we see a corona effect in many of these countries. I mean, it is difficult in many of the our developing countries around the world. We saw an initial very positive effect. But as we also said, when we did the top line guidance for Q3, we saw a big churn coming in these countries in July specifically, as you mentioned. And I think they're struggling in many of these territories. So that's definitely affecting us in a negative way. But that said, we're growing with more people in an absolute number this year than we did last year in the same quarter. Thank you, Jorgen. And to follow-up on the non Nordic businesses, it's very interesting to follow your progress in you commented Russia in the report, but also India to name just a few markets here. But can you just provide perhaps some sort of update on growth momentum, ambitions, etcetera, in India now that I mean, you have exclusive titles to dig into the Marathi speaking population? Yes. Thank you. I think our strike to make our service as local and with a local product market fit as possible is what we are doing. And sometimes, we are launching a country with a more broader decision. And then we start pruning, of course. So this is part of a natural cycle for us to prune our offer to the public. And I think one has to consider India being a country where we have a large disparity difference between different income groups. And of course, having them service that costs, if you compare it to other streaming services, 2x or even 3x, it might be a difficult thing for somebody to test such a service. And hence, we want to ensure that we can work more with a local approach. And this is what we've done with the Maharati language. We have targeted really Maharati speaking customers. And I think we are gaining some positive momentum. And when it comes to Russia, we can definitely see that one of the things we did in Russia also is something that when we did a new payment instruction for Russia with partnership with Yandex. We could also see that, that made a great momentum. So payments and, of course, languages are great ways to get to our local customer groups. And one has to understand that India is made up of 20 different languages apart from English. And Hindi is the administrative language, but many different language groups across India are seeking different languages. And this is also something we have in our service. But we have now tested it with Maharati and it's yes. That's very positive sign so far in terms of the how people start engaging and using the service and conversion from trial to pay on select Marat is incredibly good. So I think we have really good hopes that, that will be a very big volume game for us. But of course, obviously, the pricing there about SEK 15 to SEK 20 per consumer month, that's it will require a lot of volumes with to make a big impact on our growth rate. Yes. And also fun to point out that Marathi is actually the 10th biggest language in the world. So that's why we talk so much about it. Very interesting to monitor that going forward. Thank you. And just finally from me, coming back to you, Jorgen, I mean, it's very impressive underlying profitability improvements that you're seeing here. And obviously, the business model is working with scale and loyal customers. But That being said, I mean, personally, the marketing spend is something that caught my attention here in the quarter. I mean, can you talk a bit just about why your country managers believe that it makes more sense to, say, prioritize not perhaps road to profitability, but lessen the marketing spend as where we are right now, What factors goes into that trade off between chasing further growth and profitability where we stand now? Yes. Thank you, Hakim. Yes, I mean, we have all along trained our country managers, Ringer have trained our country managers very well in making sure that when we spend marketing money, we make sure that we get them at an attractive acquisition cost, subscription acquisition cost that we track intensely. And also comparing that to the customer lifetime value that we project for those customers as well. So we have good ratios between those. So when the country managers see that we are not performing according to those metrics, they then cut the marketing back home and restart the marketing effort with a new trial. This we saw partly in Q3 and hence a good pick from your side. As you saw, our marketing spend was somewhat lower than usual in the quarter. And this is also, of course, positive for our contribution margin and our EBITDA. So that's where it all comes down to. So sometimes you could think, of course, it would be fun if they even spend some more to increase the top line, but it's good that they have the financial discipline to make sure that we grow in a profitable way. That's what's behind that. And this makes sense. But just to follow-up on that, if I mean, if it comes down to the customer acquisition cost, which didn't look as favorable as you would have wanted to chase more top line, What drove that trend? I think that the acquisition cost of such for new trial users is always want to improve that, but I think that's okay. And I think the challenge we're seeing, which we have good hopes will improve a lot is to get the activation and usage of the trial usage to go up so that the conversion improves and hence the customer lifetime value improves, which makes the ratio to SAC more favorable. And this is why we see this new subscription of the Select Malatte in India. And I'm sure it will be followed by a lot of other select subscriptions to all the other 7 languages we have in India. And also the light subscription in Finland, incredibly interesting because we can really track that the churn numbers do improve and the metrics looks more favorable. We have more of those. And they will then scale and be rolled out in more and more markets. And hopefully, we'll see that improving our sales bit of saturation and more going forward. I also think you're sort of partly a corona effect, what we can see in the marketing efforts as well. We very early decided to continue to invest in marketing when corona hit the world in Q2. And we decided to be positive and stay optimistic because we feel that we have such a great service that would really, really benefit people. And then I think what happened in Q3 was that a lot of companies woke up and realized that they also wanted to invest in marketing. And hence, marketing eyeballs became more expensive and also became a bit crowded. So that's also how, of course, the CEMs on the local level work. So it's not so easy to aggregate all our 20 plus markets into one explanation. So I think this has been truly an effect as well. Very clear. Thank you for that. Thank you. Our next question comes from Erik Oscar Ericson from Carnegie. Please go ahead. Thank you. Good morning, guys. Couple of questions for me. First of all, outside of the Nordics, are you seeing any increased competition in recent this last quarter and into Q4? Not this, Audible is experimenting with an unlimited offering in several markets, for example. Have you seen any initial impact from that? Thank you. I think that there are more and more companies interesting to be part of the audiobook play around the world. I think that from our point of view, that's only positive as it looks right now, because what we're in the face of doing is really for all these markets, Russia, Turkey, Poland, Netherlands, India. I mean, for all those Italy, for all those, we have to build the market and build the awareness about audio talks. And that's a big challenge. And I think having someone on our side that helps us build that is really, really helpful and much more important than the negative impact of having a competitor. I think that on the whole, that really helps us. That's what we've seen in Sweden where we kept growing by 50,000 subs every year for the past 7 years, even after we've seen competition come in intensely. So yes, I think it's a good thing that we do see more actors coming in. And us having a strong position on most of these markets is a good thing. But I think what would really matter is what it will look like in 3, 4 or 5 years. Got it. And a quick comment on Audible experimenting with an unlimited offering in, for example, Spain, Italy since earlier. Could you just elaborate on if you've seen any impact or sort of first signs from that? Yes. Thank you. Well, it's not the first market that Audible is really elaborating with this. We have lived side by side with Audible in the Italy markets, where we where they also have a subscription model that is unlimited offer. I think it's more clear to well, maybe I'm biased, but it's more clear for the general consumer that understands an offer that is unlimited. So I think Audible has, of course, wanted to understand how that would work in markets. And if they now they have launched it in also Spain, we are now then 2 strong players in that market. And back to what Jonas said, we can build the market together. And since we have the same kind of offering with an unlimited model, not a credit model that they typically have had historically, I think we can really educate the market on how such a service works. Got it. Very clear. And a question on the Nordics as well. You discussed the marketing dynamics a bit here, But could you also perhaps talk a bit about the Nordics? Are you seeing local competitors being very aggressive or perhaps too aggressive on customer acquisition? And is that sort of the main explanation to your very solid contribution profit in Q3, which is typically quite marketing heavy? Thank you. I mean, we can see our marketing cost as a percentage of revenues going down slowly on the Nordic market. But the competition is incredibly serious, I would say. It's very competitive markets. And we see that the penetration levels of audiobooks streaming subscription services are approaching 8%, 9% as a percentage of the population above 18 years. So I think it's competitive markets. We have competitors with access to capital that do invest a lot. We have very strong market positions in Sweden, Denmark, Norway, Iceland, Finland, we're 2nd. But I think it's a fun game that plays out where the audiobook subscription services stand very strong and are able to grow also the overall book markets. Looking at the Swedish market, it's been growing now by 10% over a 2 year period or 9% over a 3 year period, entirely driven by the streaming business subscription services, digital now being about 50% of the overall market. That's what we've seen in Sweden. We see similar trends in Denmark, Norway and Finland. I think that gives us a good case also when we go out around the world and it's convinced U. K, U. S.-based publishing houses that the streaming subscription model is a good one and has a positive net effect on the overall book market. I think that's something that is a big task for us, a big challenge. And hopefully, we'll succeed in being able to demonstrate that and therefore, making it easy for us to attract really strong English speaking content. Excellent. And final question from me, the Storetail Lite offering in Finland, should this be seen as a pilot for other markets, I mean, in the Nordics to start? Or is this an isolated model specific to Finland? And why in that case? Thank you. Well, I guess that's the answer I will give you is really that we're piloting it. And I cannot say without having evaluated it whether or not it will be a model that we will continue with in other markets. Every market is specific. And I think that's how we view the world, that we do a local approach in each country. So when we're testing something, obviously, we try to learn from it and see whether it would make sense in other markets. But it's really too early to tell whether we would use such a model in other markets for now. Got it. Thank you very much. That's it for me. Thank you. Our next question comes from Hamed Zhivu from Kepler Cheuvreux. First, just a follow-up maybe on the shorter light. Is there any difference on profitability? I mean, I guess, ARS per is lower, but it's a different on how this impacts profitability versus the same kind of profitability on this compared to the unlimited version? Yes. It's Jonas here. It's a limited consumption in this, only 20 hours max per month. So you would expect the average customer on that subscription type to be on a lot lower average consumption. You may know that, for instance, on the Swedish market, we do have about a quarter to a 5th of our customers consuming an average of 100 hours per month. So it's quite high consumption. So I'd expect, if anything, probably that the profitability would be just as good as at least as the other the unlimited subscription. Okay. Thanks. And a question on new countries. I mean, you launched in Thailand, Indonesia and Belgium. And you have a lot of new countries that we don't know in the pipeline for the next How does the competition look in these new markets? I guess it's different than all markets. But do you see in general more competition when you launch in this? Or is it similar as you've seen in the last years when you launch in new markets? Yes. Thank you. Actually, what we see is, for example, in Thailand and going into Indonesia, we as we have announced doing that for Q2 next year, We're actually seeing more of a pioneer situation where we have to actually start already early on and producing a lot of books to audio. In some of these countries, the audiobook is not even a specific phenomenon. So digitizing is the first step. And then secondly, of course, communicating our offer to the public. But we see a very positive effect from more and more publishers that we speak to in more parts of the world that are really eager to continue on the same road that we have shown and proven that we have done in other countries before. So it's a positive momentum, but many of the countries out there are still unexplored for us. Got it. And I mean, coming to acquisitions, you made quite a lot this quarter. Do you think this is, I mean, new important part of the model when you expanded new countries? Or was this quarter a bit unusual in that sense? It was an intense acquisition quarter for sure, I can tell you, from the finest department at least. And I think we have our eyes and ears open. We just hired an M and A manager to the company to look into those opportunities. And as you know, we have gunpowder, I. E. Cash, dollars 5.80,000,000 in cash and a credit facility of an additional €500,000,000 So definitely looking at possibilities to acquire in other countries going forward. Any specifics, as you understand, I cannot give you. Thanks. And maybe last question on the growth, long term growth to 2023. You have 35% revenue annual average annual growth. Can you give any I mean, do you think this could be tilted towards the end of this period? Or do you aim to have, I mean, smooth growth over the next 2 or 3 years? Is that very difficult to say? Yes. I think we can't comment on that right now. Yes. Okay. Thank you. Thank you. There appears to be no further questions. So I'll hand back to the speakers for any other remarks. Well, thank you very much for listening in. I think that's it for now, but I'm sure that you'll hear from us in other instances throughout the coming couple of months. So thank you for now. Thank you.