Sleep Cycle AB (publ)

based AI already trust by millions nightly to enable non-invasive smartphone based apnea screening. No wearables, no cables, no clinic visits, AI powered screening using only the iPhone microphone. Affordable and accessible for underserved populations. So medical grade precision, but consumer grade simplicity. It's a natural extension of our platform and it's aligned with our mission to improve global health. And importantly, it reflects the shift toward proactive personalized health care, enabling earlier detection at that scale. So sleep apnea obviously represents a strategic leap for sleep cycle. It significantly expands our total addressable market, and it creates a new high margin revenue stream, both through in-app B2C purchases and emerging B2B opportunities. We're basically stepping into preventive health, aligning with a global shift towards proactive at-home care. The home testing market alone is already around one billion US dollar and growing. So there is a massive unmet medical need, and we are making screening more accessible and tech-driven. This move position us not just as a sleep app in the future, but also a health platform for the future. So to validate our solution ahead of our FDA application, we are right now running a clinical study led by two of our foremost experts. This study is conducted in Australia with 700 participants. In parallel, we're getting ready for everything that needs to be in order before submitting to FDA. And after that, of course, also to CE for being able to sell this in the European markets. But now let's look at our cue to performance. So I hand over to Elizabeth.

Thank you, Erik. Now let's look at our financial development for the second quarter. The number of paying subscribers decreased by 2.2% year over year, landing at 878,000. This was mainly driven by softer market conditions and a lower intake of new customers. On the positive side, retention rates remained stable and are gradually improving, which confirms the strength of our core subscriber base. Our partnerships are also growing, but not all of them generate reported subscriptions. The total net sales decreased by 2.9% or 0.6% FX adjusted, given the tougher D2C market conditions. Sales from partnerships has, however, increased with 68% year over year and now stands for 9% of our total net sales. We do see currency effects on ARPU which declined by 3.9% to 271 SEK. ARPU is 11 SEK lower compared to last year, where 6 SEK of the decrease comes from FX effects and 5 SEK from price dynamics. We have converted freemium users into paying subscribers through discounted offers, which temporarily puts pressure on ARPU. But during the summer, we carried out extensive price tests in several of our largest markets. And based on these learnings, we have implemented price increases during August. And we do expect slightly higher underlying RP levels going forward. Despite the sales headwinds, EBIT came in at 11 million SEK, corresponding to a margin of 28.4%. And this underlines our profitability, and importantly, it provides us with the flexibility to continue investing in partnerships, product innovation, and new revenue streams to support the long-term growth of Sleep Cycle. Looking at the historical development of paying subscribers and net sales, we do see a period of solid growth followed by the current quarter's softer performance reaching 878,000 paying subscribers by the end of the second quarter. And the decline in net sales is reflecting the same trend. Fewer new customers during the first half of the year, combined with continued pressure on Arby. I want, however, to note that the FX adjusted net sales decreased by only 0.6% and our partnerships are growing at a fast pace. To repeat, revenue generated from partnerships increased by 68% and now stands for 9% of the total revenue. So while the historical figures show a period of solid growth, this quarter highlights the challenges in new customer intake combined with FX pressure. At the same time, our base remains resilient and our partnership developed really well. Turning to profitability, despite softer revenues this quarter, profitability remains at a solid level at 28.4%, and we have no NRIs affecting comparability. In fact, our adjusted EBIT margin has been above 25% for six consecutive quarters, which underlines the profitability in our business model. Even in a more challenging market environment, our financial performance remains robust and that gives us flexibility to continue investing in areas that will fuel the next phase of growth. Looking at the profit and loss statement for the second quarter, Distribution costs are a bit lower as a result of lower sales to new customers, which come in at a higher commission. And we are investing more OPEX in line with our strategy, aiming to add new revenue streams and more partnerships. In addition to this, we invested a further 3 million SEK in CAPEX during the quarter, primarily related to the continued development of our AI-based sleep apnea screening, which is now in a clinical study phase. Staff costs are on the same level as last quarter, as last year's figure included costs related to the incentive program as well. We continue to have a strong cash position and a good cash flow. And note that we paid out a dividend of 61 million SEK during the second quarter. So for the first half of 2025, the pattern is consistent. Net sales were slightly lower compared to last year, while profitability remained solid. EBIT margin for the six-month period stayed strong, supported by growing partnerships and efficient operations. At the same time, we invested 6.8 million SEK in CapEx during the first half of the year, mainly in the development of our sleep apnea screening solutions. The key takeaway here is resilience. Our core business delivers solid profitability, which does give us financial strength to keep investing in long-term growth. Now over to you, Erik.

Thanks, Elisabeth. So to me, this quarter marks real traction in new key areas that support both growth and diversification. And we do this while still delivering on our EBIT margin targets. First, we saw more than 60% increase in partnership revenue year over year, now being close to 10% of our total revenue. It's a clear signal that our strategy is working and it's a critical timing given the softening demand in App Store and Play Store for the sleep category that I have signaled already in the previous quarter and also during the end of year report. Secondly, the clinical study for sleep apnea is progressing well. It's a major step towards launching a medically certified offering and a future revenue stream that leverages our existing platform and expands us further into digital health. When we succeed, we will be breaking new ground. And the journey has already started with pre-submission meetings with FDA, as well as I already said, the clinical study is underway. And third, The launch of Powered by Sleep Cycle, which has opened up new conversations with potential partners across wellness, healthcare, and connected products. It's early, but it's clear. This model creates commercial upside well beyond the app. More partners are engaging around the SDK integration and exploring how our sleep technology can add value to their platforms and customers. I'm super proud of what the team have achieved in this quarter, and with that, I'm happy to take any questions you might have. So let's go into the questions.

So we have a question from Jessica Grunewald at Redeye. Last quarter, you highlighted a 10% decline in downloads year over year. What did Q2 look like and are there any emerging trends in Q3?

So the softening continued in quarter two, and we also see that trend into quarter three. And to me, that's why it's so critical that we succeed with these new revenue paths. And I think showing how much we can grow partnership revenue now being close to 10% of our revenue It's a strong sign that we can diversify so we are less reliant on the app stores and the play stores. And I have to say that historically, you know, sometimes it goes up and down in the app stores. So, of course, we're working hard to turn it around, but the segment as such is declining and we don't see it slowing down yet.

Can you update us on subscriber retention and churn for the quarter? We don't give an exact figure, but what we can say is that we can see that it has gradually improved during both this and actually last quarter as well compared to last year. So we're seeing positive trends. We're working with win-back campaigns and a lot more with CRM to target our customers and make them come back. Okay, so we have a question from Rasmus. Could you provide more detail on the margins you're seeing in the partnership segments? Specifically, how do you see margins compared to your traditional subscription revenue? Well, actually, we see higher margins in the partnership area as we don't always have to pay a commission to Apple that is 30% to new customers and 15% to returning customers. In some cases, we could see a rev share collaboration, but the ARPU is a bit lower on these partnerships. Another question is, can you be more specific about the headwinds you're facing in subscription growth? Rather than just describing it as a general market challenge, can you clarify whether you identified specific factors like competition or user fatigue so we know if it's something you can address?

I think it's a combination of several things, but we also have to remember that the app stores and the play stores, it's very much dictating what kind of, what type of apps they want to surface. And right now they surface our category less than they have done historically. I think that is the shortest answer to that question. And the way we address it is, as I said, again, we are working with upper funnel activities, both in marketing and PR. We have had huge success in PR. I mean, we're mentioned in outlets, in consumer outlets, and also in networks in the US that most companies of our size, or to be honest, any size, would dream about. So we are doing a lot of things up the funnel, but so far this year, we've been working a little bit swimming upstream in this area. And that's, again, why I think it's so important that we can double down and show that we can grow other revenue streams that we are in more control of. And partnership, I think, for this quarter is a clear indicator that we are in control of our business being able to grow that area. And then there was something about the market share, how we measure progress and what are the concrete indicators that it's increasing. So what we're looking at is, of course, there are some tools available and they're also available to some of you. And there we are looking at our main competitors over time and how they are developing their downloads compared to last year and also how the segment then by itself is developing.

All right, then we have a question from Martin. Can you please let us better understand the decrease in depreciation and impairment of tangible and intangible assets? Yes, we can. So since we are reporting according to IRFS, We need to handle our leases in this post. And last year we had an office in Stockholm and one in Gothenburg. We only have one in Gothenburg. So that's why that amount is smaller. How does the best case timeline look for the Sleepapnea project? How could a go-to-market strategy look like?

So it's a very good question and it's also of course dependent on the progress of the clinical study, so the pace of the clinical study. I would say we are roughly through 10% of the people in the study as of now and we are accelerating it week by week. The other thing is, of course, the timeline of the regulatory bodies that needs to approve the submission, basically. So I would say, if we're live towards the end of next year, and go to market-wise, we are envisioning two products, one B2C product. So basically, you would take a sleep apnea screening test, test in app. And there we have a huge benefit of having a customer base already. And we know that we have a very engaged customer base in general. So of course, surfacing them contextually relevant sleep apnea screening test is something that we have high hopes on. And as you know, in digital development, you can conduct certain fake door tests, etc, to see how the conversion could potentially look. So we're very confident in the test that we have done so far. And in parallel, we are also seeing quite some interest from the B2B segment. So there are quite big players in the telemedicine space, but also sleep clinics, et cetera, which is looking for a way to have an easier way for customers basically to find out that they have sleep apnea or at least should see a clinic to get the diagnosis.

We have another question regarding the sleep apnea project. Do you expect this sleep study to be enough for an application to FDA?

Yes, we do. And it's an extensive study that we're doing. And of course, doing a study of this size means that you need to adhere to all the ethical guidelines, etc. And we do that, of course, and we take this very serious.

Another question regarding sleep apnea. How do you plan to monetize your sleep apnea screening feature as competitors like Sharai, who are seeing faster growth pace compared to you, have already implemented similar screening? Do you want to address that?

Counter-approved sleep apnea screening in the world. I know that some of our competitors has been experimenting with how they label certain features and also how they market certain features. I also know that they've been kicked out of App Store in the UK, for instance, a while ago, and they had to remove certain things. So, I mean, we're a listed company. We're based on science. So we're going to do this and we're going to do this in the right way. And as I said, we've seen quite promising tests in the fake door. So it's basically a user test that we do in app to see how people convert, even though the product is not ready. So I feel very comfortable and confident in what we've seen so far.

And another question from Richard at Carnegie. Do you have any timeline for the sleep apnea projects?

Yes, I said I have. have to next year. So that's the ambition we have.

Yes. Then we have a question regarding how we view Apple's IP stack concerning sleep tracking. Are we in contact with Apple? And have we explored collaborations with breeding companies?

I mean, we are always in dialogue with Apple. As we've seen before, when Apple talk about sleep and when they invest in sleep, they actually broaden the upper funnel. So it's good for us. So what usually happens is that people or consumers start with what Apple offer and then they get curious and want something more robust. And then they usually end up with us because we are, as you know, the leading sleep tracker out there. And so I don't see any problem with that. And in terms of technology partners, we're speaking to a variety of partners now in the SDK, so in the tech licensing stream as part of Powered by Sleep Cycle. So we're definitely on it.

And then we have a question from Ina Jypsund at SEB. Do you think that you can maintain this level of revenue from partnership or is there a significant volatility here quarter over quarter?

Well, I expect it to grow quarter over quarter.

Yeah. And then we have a question, if we can expand a bit on the 19% increase in other external expenses, how much of that increase was on marketing and what levels of return are you seeing on that spend? I can expand on that. As you know, we are exploring many new potential new revenue streams, and that is with a cost as well as we are a small team that cannot do everything ourselves. As of marketing, the marketing spend is on the same level, but we are working more with CRM system and experts to convert our customers and keep them longer. And then a question from Martin, again, about the capitalization of development expenses in the cash flow statement, why it's not the same as in the P&L. So the capitalized work for own account, that just means that's capitalized costs for our own staff, whilst we are doing other investments that are purely external costs that we would not have had in our P&L if we if we hadn't done these investments or these projects. So that's the way we usually report these types of items.

Good. So thank you everyone. I think it was very good questions. As I said on the end of the call, it's a very exciting autumn. We are growing in the areas that we can fully control and that of course gives me and the team some energy. We have exciting things around the corner that we have started to share even more about today. So thank you so much for tuning in and thank you so much for being with us. Thank you so much.