Sleep Cycle AB (publ)

We have the formula to the greatest performance enhancer in the world. We'll make you stronger, faster, smarter and happier because we have the keys to healthy sleep. With a third of the population being sleep deprived, but a market potential of more than 130 billion US dollars in the US alone, We don't think sleep is a problem. We think sleep is an opportunity to reach your goals, to be a stronger, faster, smarter, and happier you, because we are the future of sleep health and you are welcome to join us.

Good morning everyone and welcome. Today we're sharing the interim report for quarter four. My name is Erik Lidmark. I'm the CEO of SleepCycle and with me I have Elisabeth Hedman, our CFO and Head of Investor Relations. We are SleepCycle, the world's leading sleep technology company. And part of what is so great with our product is that all it takes is a smartphone to use it. No additional hardware purchases. We are available on all common smartphones and wearables in 150 countries and 13 different languages. Every night we have more than 1 million active users helping our users to fall asleep faster thanks to our sleep aids, waking up gently with the help of our patented smart alarm and also we help our users to analyze and provide insights to their sleep habits. We are a subscription based business with a strong growth potential. Let me break down why we are a compelling investment. Our core business is highly profitable with predictable recurring revenues and an annual dividend of 40 to 60% of net profit. We are the most used sleep app backed by science and also patents with 80% organic customer growth and partnerships with leading sleep research institutions, such as the University of Cambridge. Also, the sleep tech market is worth roughly 17 billion CIEC and growing. With increasing awareness of sleep's impact on wellbeing, our addressable audience includes anyone with a smartphone. Going forward, we're expanding through revenue management, geographic adaptation, strategic partnerships, and also exploring new revenue streams. Our strategy that we presented last year remains focused on three key areas driving our growth. We continue expanding our reach by improving upper funnel traffic and increasing sleep cycles visibility across more channels. In Q4, we've conducted price increase tests, which we will accelerate in Q1. We see positive signs on sale, but it has a negative impact on user growth. I believe we will see an impact when we continue to adjust the prices in the coming quarters. In Q4, we also ran successful campaigns converting free users to subscribers. Although we are at an industry average when it comes to churn, our focus is on conversion, customer engagement, and retention. This includes win-back campaigns for churned users, continuous product innovation, and also strengthening our core technology and data reliability. In Q4, we released successful win-back offers, as well as new technology for full sleep staging, which was a world first. We will look into moving this feature to premium only to try to further differentiate the offerings between free and subscribers. And finally, we will be intensifying our work to find new revenue streams by leveraging our technology and platform. A key milestone is our breakthrough world first non-contact full sleep staging. The technology behind this innovation allow us to take the next step, exploring medical grade certification for sleep apnea screening. This is exactly what we mean when we talk about the untapped potential in our technology and platform. We will get back with more details and timelines. The first two focus areas is us doubling down on our core product. Sleep is ours to own. The third, it's an area that could fundamentally transform our business over time. If we take a closer look at our data and technology, Sleep Cycle is already delivering value to millions of users by leveraging the insights we gather. Right now, we're exploring how other companies could use our technology to build their own sleep experience tailored to their users' needs, powered by Sleep Cycle. This could apply to apps that serves a different primary purpose, but where sleep is a key factor in helping their users achieving their goals. In these cases, they wouldn't license our app or our user experience, only the core technology that powers it. The same applies to data. We're actively exploring a web version of CoughRadar to drive product awareness, and we're also exploring the potential for others to purchase anonymized data. It's still early days, and I will keep you updated when we progress in the coming quarters. In Q4, sleep tracking took a giant leap forward. For the first time ever, we're using breathing and movement to deliver full sleep staging. completely contactless, no wearables needed, just the sound of your breath and movements. Every night as you drift into sleep, something quite extraordinary happens. Your body rests, but your brain doesn't. It processes the events of the day. consolidates the memories and it's also in a way orchestrating the rhythm of your sleep cycles. Now with breakthrough precision, our AI driven algorithms can detect and reveal these patterns, giving our users a deeper understanding of their nights than ever before. This is again a technical innovation, building confidence for us to explore the medical grade certification for sleep apnea screening. smarter sleeps insights with the same effortless tracking that is pretty much the future of sleep cycle partnerships play a key role in our strategy we talked about it before it helps us expand into adjacent segments and it's also strengthen our local market presence By collaborating with the right partners, we are not only extending our reach, but we also reinforce our position as a leading authority in sleep. Our partnerships take different forms. Some are very commercially driven, while others deepen our expertise in sleep science. But they all serve one overarching goal, customer acquisition with highly cost-effective customer acquisition costs. Last quarter, we announced our latest partnership with MyFitnessPal. While we didn't go live as planned due to this being a new type of partnership which was out of our control, the opportunity remains ahead and we just went live with parts of the offer. It's too early to say anything about the potential impact. Looking at the financial targets, We are strengthened by the successful 2024 and hence we are updating our EBIT target going forward to 25% or higher on an annual basis. We're still committed to doubling the revenue in the midterm and the dividend policy is unchanged. We're combining profitable growth with an attractive yearly dividend. And with that, I'm handing over to you, Elisabeth.

Thank you, Eric. Now let's take a look at some of our financial KPIs for the fourth quarter. And after that, I will walk you through the P&L for both Q4 and the full year of 2024. So year over year, the number of paying subscribers grew by 2.8%, adding 25,000 net subscribers, bringing the total to 918,000. This growth is the result of our focused efforts on customer acquisition, converting free users into paying subscribers, and the positive impact of our existing partnerships. At the same time, ARPU increased by 2.6% to 279 SEK. The growth in ARPI was slightly slower in Q4, mainly due to our successful strategy of converting the free users into paying subscribers, many of whom start at a discounted rate. While this initially affects the ARPI metric, it's a positive long-term development as it expands our paying customer base and strengthens our revenue. And looking at the net revenue, we saw a 9% year-over-year increase reaching 66.8 million SEK. And the EBIT for the quarter came in at 21.5 million SEK with an EBIT margin of 32.3%. We're very pleased with the strong margin, which reflects our ability to grow revenue while maintaining disciplined investments. 2024 has been a year of solid growth in both paying subscribers and net revenue, as illustrated in the charts on this slide. Our base of paying subscribers, shown to the left, has now grown for six consecutive quarters. In Q4 alone, we added 3,000 net paying subscribers. And on the revenue side, seen to the right, net revenue has increased consistently throughout the year. Given SleepCycle's subscription-based business model where revenue is recognized over time, our reported revenue reflects the sales from the past 12 months. For Q4, the revenue growth was 9%, while the full-year growth was 10.7%. Looking ahead, as Erik mentioned, we plan to conduct additional price testing to better understand the customer's willingness to pay. This might lead to a short-term slowdown in subscriber growth, but it's a crucial step for strengthening the long-term net revenue growth for Sleep Cycle. All right, let's take a look at some highlights from the P&L for Q4. The fourth quarter was marked by continued growth and a strong EBIT margin, and the growth was driven by expanding subscriber base and a higher ARPU with our partnerships continuing to contribute positively to the revenue. The growth was 9% or 8% when adjusted for currency effects. During this quarter, we also made strategic investments in our new initiatives. And one key area is our exploration of medical grade certification for sleep apnea screening, a process that we have now initiated. And these investments will continue in 2025. And we look forward to sharing more insights as we progress along the road. And looking at the other external costs, they were 1.7 million SEK higher in Q4 compared to last year. And it's important to note that in 2023, the marketing was handled in-house, whereas in 2024, it has largely been executed by external consultants, which is reflected in our other external costs. And during this quarter, we continue to refine our marketing strategies, but we're still evaluating how to achieve the necessary return on investments before scaling the spend further. And regarding the staff costs, we had an average of 34 employees in Q4. That's three fewer than previous year. For depreciation and amortization, keep in mind that last year's figures included a 6.3 million SEK write-down related to sleep cycle kits. So the EBIT margin for the quarter was 32.3% supported by revenue growth and disciplined investments. And at the end of the period, our liquidity was 145 million SEK and the cash flow from the operations were 17.3 million SEK for the quarter. Let's summarize the year of 2024. It was an important year for SleepCycle as we made several fundamental changes to position the company for profitable growth. We brought the team together under one roof in Gothenburg. We launched an updated strategy and established a nearly new management team. And these steps have helped lay the foundation for further growth and the exploration of the new revenue streams. And from a financial perspective, 2024 was a strong year. The net revenue grew by 10.7%, with FX adjusted revenue growth at 9.8%. Given that we are a global company with a significant portion of our sales in US dollars, currency fluctuations impact our results. By comparison, the FX adjusted growth for 2023 was 3.1%, highlighting an improved underlying growth rate this year. And the revenue growth was driven by an expanding base of paying subscribers and higher ARPU and successful partnerships. When it comes to profitability, we maintain strong margins, delivering an EBIT margin of 29.4% for the full year or 31.6% when adjusted for non-recurring items. And while we will continue to invest in strategic initiatives, we remain committed to EBIT margin discipline. In line with this, the board has updated the EBIT margin target for sleep cycle to at least 25% annually. Sleep Cycle's solid financial performance allows the board to propose an attractive dividend for our shareholders. At the end of the year, the liquidity was 145 million SEK, with free equity at 74 million SEK. The board is proposing a total dividend of 60 million SEK or 3 SEK per share, consisting of two elements. First, an ordinary dividend of 185 SEK per share, which is at the higher end of our policy range of distributing 40 to 60% of the net revenue, net profit, sorry, back to our shareholders. And then there is also an extraordinary dividend of 1.15 SEK per share.