Sleep Cycle AB (publ)

Hi everyone and welcome. Today we're sharing the interim report for quarter one. My name is Erik Gilmark. I'm the CEO at SleepCycle and with me I have Elisabeth Hedman, our CFO and Head of Investor Relations. We are Sleep Cycle. We are the world's leading sleep technology company. We have a mission to improve global health by helping people to take control of their sleep. We are used and loved by millions and available in more than 150 markets, in app stores, and as part of many wearables. At the core, Our app help people build healthy sleep habits, something that is more needed than ever. What set us apart is that we're not just the world's largest sleep app, we have a proprietary technology platform as well. Everything we do from sleep tracking and smart alarms to audio features like sleep aids, snore detection, and sleep talking recording helps users understand and improve their sleep. And it's all built on proprietary audio and sleep science technology, engaging and powered by science. There's a lot of uncertainty in the world right now, and the macroeconomic pressure is impacting markets across the board. During Q1, we saw a continued downward trend among many of our peers in terms of downloads. This isn't new. We already saw signs of this in Q4 as shared at our year-end call. And while we're still growing our subscriber base year over year, which shows our relevance and resilience, we are also impacted. The slowdown has also continued into April. Now, despite the drop in downloads, which is affecting the entire industry, and as I said, many of our competitors are down much more, there are some bright spots. Our brand has a strong presence and what I often said before, a true market fit. And we see that our conversion rates and annual renewal rates are steady. That tells us that the users who do come in are highly engaged and sticking with us. Also, we have to remember, even though the sleep segment is down in the app store right now, the societal interest for sleep has never been greater. That's why we're doubling down on expanding beyond the app. We stand by our financial targets, but it will not be a linear journey. So we've continued to gain market share in a tough quarter. That's a direct result of our focus on what we can control, like onboarding and win-back strategies, which are paying off. Churn is going down. We see that the release of sleep stages in December have improved data reliability, which was a strategic bet for decreasing churn. We're truly focusing on what we can control and the team is doing it well. We're currently growing faster than our competitors, and that momentum is fueled by organic loops and a stronger brand presence, and we are only down around 10% in new downloads. This is thanks to our true product market fit. We see that some competitors relying heavily on paid media and less on product development are down massively. Our efforts regarding new customers are taking shape with a newly formed team as well as the launch of our refreshed brand. On the partnership side, we have renewed our agreement with WellHub under much better terms, locking in a guaranteed revenue for several years. Our collaboration with Revolut is also progressing well. MyFitnessPal, on the other hand, was something we were clear about that we didn't really know what to expect given the new way of partnering and also the underlying technology. But we can conclude that it has not performed and we're closely evaluating the next steps there. So sleep and its benefits are as relevant as ever. Our basic human needs haven't shifted. People still need quality sleep to function, to focus and to feel well. If anything, the demand is growing. But what we see is that sleep is also being consumed outside of pure sleep apps. This represents both a challenge and an opportunity. It's pushing us to think more broadly about how and where our technology can add value. This is why Powered by Sleep Cycle was born. At the core of everything we do is our AI sound model. It's developed in-house, it's trained on over 3 billion nights of sleep, and it's continuously evolving. This technology is what powers the world's number one sleep app, but it's so much more than that. I mean, it generates unique data insights, it enables smart features like full sleep staging and snore detection, and it creates real value for users night after night. But we're no longer keeping that power just inside the app. With Powered by Sleep Cycle, we are opening up our technology to the world. That means others can license our SDK and integrate it into their own products and services, whether it's wellness, healthcare, wearables, or even physical products. So whether it's enriching our own app, unlocking new revenue streams through data and integrations, or addressing global health challenges, this platform is designed to scale. We currently have multiple discussions underway with potential partners who are interested in exploring these kinds of integrations. These conversations are of course also helping us shaping our offering. However, we're not only looking to use our platform and technology to power others, but also our own future. Sleep apnea is a massive global health issue and still dramatically underdiagnosed. Our technology and also the ability to understand breathing gives us a unique opportunity to address this at scale directly from the phone. We're now starting the process for medical certification. It's a big step forward. It's still early days, but if successful, Sleep Cycle could become the first FDA and CE-approved app for large-scale sleep apnea screening. Of course, a medical certification would also help us in many of the partnership dialogues and build increased trust in our product also outside sleep apnea. We're confident in our technology and in the value it can bring. The potential market is big and the need is real. Our goal is to kick off the clinical trials in quarter two, marking the beginning of a long-term opportunity to help millions of people sleep and live better. And with that, I'm handing over to Elisabeth to take us through the financial developments for Q1.

Thank you, Eric. Let's begin with a summary of the quarter's key financial metrics. On the subscription side, we reached 904 subscriptions, which is up 1.2% year over year, but it is a decrease compared to last quarter. The ARPU amounted to 272 SEK, representing a slight year-over-year decrease of 1.5%, mainly driven by weaker new sales that is also negatively affected by the weaker US dollar and efforts to convert free users to paying subscribers. We have had more customers coming in at a lower ARPU. During the first quarter, we recorded a 2.3% year-over-year increase in net revenue, reaching 64.9 million SEK. And the EBIT came in at 17.1 million SEK, corresponding to a solid EBIT margin of 26.3%, a reflection of continued cost discipline and operational efficiency. Despite some short-term headwinds, the long-term development has been stable and we're staying on course. The number of paying subscribers decreased with 14,000 during the quarter, but it's still 11,000 higher than last year, reaching 904,000. While we faced around 10% fewer downloads compared to Q1 last year, driven by the tougher market conditions, both our conversion rate and renewal rate remained steady. In a volatile market environment, we're strengthening our position and gaining market share as we see that competitors are hit even harder. This demonstrates the underlying strength of our product and our ability to retain and engage the users over time. Net sales totaled at 64.9 million SEK, and the growth rate for the quarter was somewhat impacted by a lower ARPU and a lower sales to new customers, but we are maintaining our long-term growth trajectory and strong margins. Let's move on to profitability. As previously mentioned, we reported an EBIT of 17.1 million SEK for the quarter, which corresponds to 26.3% EBIT margin. It's a solid result. The margin is slightly down compared to previous quarters, and that's mainly due to higher marketing costs and some additional investments we've made to explore new revenue streams. Intentional steps aligned with our long-term strategy. If we look at the adjusted EBIT excluding non-recurring items, our margin has stayed above 25% for five quarters in a row. For this quarter, we did not have any non-recurring items. Before diving into the P&L for the quarter, I want to take a moment to highlight the impact of currency fluctuations that we have seen more of recently. Around 40% of our revenue is generated in US dollars. When the Swedish krona strengthens against the dollar, it reduces the SEK value of those sales. Since much of our revenue is recognized over a 12-month period, the figures for this quarter reflect sales and exchange rates over the past year. If the current FX trends and software market conditions persist, they may continue to affect revenue development going forward. We're also affected by FX in another way. Although the majority of our sales is made in foreign currencies, the payments we receive from platforms like Apple are settled in Swedish kronor. There's a delay of up to two months between the time of sales and the time of payments. And if exchange rates shift during that period, it impacts the value of our transactions when it's recorded and in turn our profit. We did, however, record a net revenue growth of 2.3% or 1.6% currency adjusted. And the net revenue growth was driven by a higher number of paying subscribers compared to previous year and successful partnerships, although ARPA declined slightly due to a lower intake of new customers as well as our strategic premium and win-back campaigns. On the cost side, we had slightly lower distribution costs, thanks to a more favorable mix between new and renewed subscriptions. And the other external costs increased by 19.7%, somewhat due to higher marketing spend, in line with our plan to support future growth. Note that last year's figure included NRIs of 800,000 SEK. The staff costs were lower compared to Q1 last year, but that's explained by non-recurring items in Q1 2024 of 5 million SEK related to the reorganization and consolidation of offices. And the average number of employees were 33 during Q1 this year compared to 37 last year. Depreciation and amortization also decreased, mainly since the previous year's figure included the lease for two offices, both one in Gothenburg and one in Stockholm. Now we only have one. The other operating expenses include negative FX effects of 1.3 million SEK related to the time gap between point of sales and point of payment from Apple. Normally, these impacts are fairly limited, but due to the recent volatility in the US dollars and other currencies, the effect was more pronounced this quarter. The EBIT margin of 26.3% is in line with our long-term target of at least 25% annually. Finally, Our liquidity remains strong at 157 million SEK at the end of the quarter. Now over to you, Erik, to wrap it up.

Thanks, Elisabeth. So our new strategy was designed with this in mind, and we stand firm by our financial targets. We're focusing on upper funnel. We're bringing product improvements to the app and we see the results with decreasing churn and also new possibilities. We are taking market shares and we're also accelerating our future bets, opening up our technology to the world with powered by Sleep Cycle. I'm really looking forward to see how the new bets will materialize, capturing the general interest around sleep and the growth beyond our current market reach. Thank you for your continued trust and support. And with that, we are happy to take the questions you might have.