Sleep Cycle AB (publ)

Good morning, everyone, and welcome to Sleep Cycle's second quarter earnings call. I'm Erik Gilmark, I'm the CEO, and I'm joined by Elisabeth Hedman, our CFO and Head of Investor Relations. So Q2 was a demanding quarter for the consumer business, but it was also a quarter where the strategic shift we have been building towards became increasingly tangible. So today I want to spend most of my time on that shift. What is changing in our market, how we are broadening the business beyond the app and the progress we're seeing across the three growth pillars. But first, our mission, it has not changed. We want to improve global health by helping people to take control over their sleep. What is changing, though, is how we scale that mission. We're moving beyond app stores. So sleep cycle starts from a position that is difficult to replicate. We have analyzed more than 4 billion nights of sleep. We reached more than 82 million installs and we built a large active user base over more than a decade. And importantly, this was built largely through organic growth and also with a very efficient operating model. So when we talk about moving beyond the app, we're not starting a new business from scratch. We're taking technology, we're taking data distribution and also our sleep expertise that already exists and we apply that in more ways. And thereby, we're taking control of our own destiny. So this chart explains where we are in the journey. From 2021 to 2025, we built a highly profitable consumer business. Revenue grew, margins expanded, and B2B gradually became a larger part of the mix. 2026 is different. We are deliberately investing more heavily in new growth areas while the consumer business is under pressure. But we're funding that transformation from the business we've already built. And the objective is clear. From 2027 and onward, we want several growth engines rather than relying almost entirely on one consumer subscription product. That is the transition that we're making. And the reason why we can do that is because the underlying opportunity around sleep is broadening. Sleep is increasingly connected to health, performance, recovery and even longevity. And therefore, the way consumers experience sleep technology is also changing. It's moving into all the different spaces such as wearables, digital health, even pharma, smart home products and broader health platforms. And those environments increasingly value exactly the type of technology we have built. Passive sensing, continuous insights and software that can operate in the background. So the important point is that the sleep opportunity is increasingly larger than the standalone sleep app category where we have historically been operating. That also changes the market that we can address. Historically, we operated primarily in a sleep app market around 1.7 billion SEK. By applying the same underlying technology to sleep app NIA and tech licensing, our estimated addressable market expands to around 47 billion SEK annually. That is a structural change. So the same core technology, more use cases, more distribution channels, and much larger markets. So this brings us to the three pillars of the strategy. First, we have the Sleep Cycle app. It remains our consumer engine. It's our largest source of revenue, and it's an important distribution platform. This is where the majority of our staff is focusing their time. Secondly, we have Sleep Apnea, where we want to apply our technology to a significantly larger medical need and a much larger market. And thirdly, we have tech licensing, where partners can embed the sleep cycle technology directly into their own products and ecosystems. What connects all these is the same underlying technology platform. And that is very important because we're not building three unrelated businesses. What we're doing is we're creating multiple routes to market from the capabilities we already have. I want to zoom in a little bit on each of these pillars. Starting with the app. There is no other way to put it than the consumer business remains under pressure, particularly at the top of the funnel. Acquisition is the main challenge. But underneath the headline, there are several encouraging signals. We continue to gain download shares within the meditation and sleep tracker segment on iOS. Pricing has hold up. We have an FX adjusted ARPU at 280 SEK. We also see that engagement is improving. We have a threefold increase in sleep aid listening to mention one thing. And we're starting to build distribution outside the traditional app store funnel. So web to app is still small, but conversion and monetization are moving materially in the right direction. So the diagnosis is very straightforward. We need to rebuild acquisition, but the underlying product economics and also the engagement give us something to build from. Turning to sleep apnea, before we go into the details of the program, I think it's worth keeping the opportunity in mind. So sleep apnea is a very large and highly undiagnosed condition. Traditional diagnostic pathways are expensive and difficult to scale. Our ambition is to make risk detection significantly more accessible through a software-only approach. And 150,000 people who already signed up and registered interest gives us an indication that there is a real consumer demand ahead of launch. And the same goes for B2B, where we have a lot of interesting conversations right now with potential partners. But let's talk a little bit about the clinical validation study. So the original study itself has been executed essentially as planned. The challenge is that the fewer participants than expected have turned out to have moderate to severe OSA. So importantly, participants cannot be recruited based on previously known sleep apnea diagnosis. So we only know the clinical mix after the study nights have been completed. We don't know it beforehand. As a result, we need to find more people that has moderated severe OSA. So therefore additional enrollment is required to secure the statistical basis for the regulatory approval. That will require a materially larger investment and shift the timeline. The newly appointed board is currently preparing the decision on the scope of the extension. Our ambition is to achieve the regulatory approval in the US. That remains unchanged. We will of course communicate an updated timeline once the decision has been taken. It's also important to separate the need for additional enrollment from the broader regulatory program. We have made a number of significant milestones in this quarter. We have external specialists that has been validating the regulatory approach that we're taking. The quality system is being established against the relevant standards. The documentation has passed an external pre-audit and the design phrase is done. So the work is now about completing the required clinical evidence that we need. The dates beyond Q2, you should see those as preliminary and that depends of course on the board's decision and the pace of recruitment. But our ambition remains US regulatory approval during 2027. Finally, tech licensing. This is where we are increasingly moving from a platform development to commercial adaptation. We now have a broad set of partner-ready capabilities, and these capabilities can be embedded across a wide range of partner ecosystems. And I think more importantly, we have commercial proof. After the quarter, Ultrahuman, they converted their pilot into a commercial SDK license. We started an SDK pilot with Ant Group. This gives us an entry into the Chinese market and our global IOT agreement starts to contribute revenue now in Q3. We have also completed the UK HSA research and the collaboration we have there around COF data. So this is increasingly becoming a real commercial business, not a strategic pipeline. And with that, I'll hand over to Elisabeth to take you through the financial performance.

Thank you, Erik. So let me take you through the quarter in numbers. I'll keep this to the headlines and come back to the details on the slides that follow. Net sales were just under 50 million SEK, down around 20% reported and around 15% currency adjusted. EBIT was minus 7.5 million SEK, and that figure carries close to 11 million SEK of items affecting comparability. Adjusted EBIT was positive at 3.4 million SEK, a margin of nearly 7%. Paying subscribers ended at the quarter at 665,000 against 878,000 a year ago. ARPU was 257 SEK reported, but 280 SEK currency adjusted. The B2B revenue grew close to 30% year over year, and now accounts for around 15% of the total revenue. And we ran the quarter with 38 employees on average. So that is the shape of the quarter. We have a top line under pressure, a mix moving in the right direction, and a deliberate investment profile. So I'll take you through the mix, the bridge to adjusted EBIT and the cash position on the next few slides. So this slide is the single best picture of the transformation. The B2B share of revenue has gone from around 5% to 15% in nine quarters. That's roughly a tripling. The B2B revenue was broadly flat this quarter against the previous quarter. and the reason is specific. We renegotiated our agreement with UltraHuman during this quarter and the pilot was converted into a commercial licensing agreement. So we had a temporary kind of pause on the revenue. Year over year, the B2B revenue grew close to 30% against the 9% share a year ago. And on the signed agreement we have, we expect the B2B revenue to come in above 9 million SEK in the third quarter. On the consumer side, the currency adjusted RFP was 280 SEK against 257 SEK reported and 269 SEK last year. And that gap is the whole story. Currency is the headwind, not willingness to pay. So our price increases are showing through in the currency adjusted figures. So while the reported top line is down, the mix underneath is shifting towards the recurring higher leverage B2B revenue that we have been building for. Now to the financials in a bit more detail and what sits behind the numbers, starting with the currency, around six percentage points of the reported decline is exchange rates, not lost business. So currency adjusted, the decline is around 15% rather than 20%. And it's worth being precise about where the rest of it sits. It's in the new B2B sales. It's not within retention. Renewal and pricing are holding up. The pressure is at the top of the acquisition funnel. Against that, B2B grew close to 30% year over year with an increasing share of it recurring. Sequentially, it was probably flat for the reason I mentioned on the previous slide, but the year over year trend is the one that matters here. On costs, the reported lines in the table carry the items affecting comparability. Close to 9 million SEK of transaction costs for the offer sits in other external costs, and just over 2 million SEK for the reorganization sits in personnel. Excluding those, which is the like-for-like comparison, the cost base is still up, and that is deliberate, the technology platform and the partnership business. The other side of the margin is simply the top line. The revenue that we lost is B2C and that shortfall weights directly on the margin. So the reported margin was minus 15% and adjusted close to 7%. And the difference between those two is the items affecting comparability, the offer and the reorganization. I will show you a bridge on the next slide. So here is the bridge. We start at minus 7.5 million SEK reported. We add back around 9 million SEK of transaction costs related to the public cash offer and just over 2 million SEK of reorganization costs. Together close to 11 million SEK of items affecting the comparability between the quarters. That takes us to an adjusted EBIT of positive 3 million SEK with a margin of nearly 7%. The point I want to leave with you is that both items are non-recurring and separately identifiable. This is not a redefinition of the underlying cost base. The costs are related to these two items. On cash, the headline is that operations still generate cash. During this quarter, we paid a dividend to shareholders and we invested primarily within Slippapnea. That's why the cash flow is reflected this way. It's also that internally we have no debt, so we do not expect to need external capital while still returning capital to shareholders. So the investment program itself is fully self-funded. And with that, let me hand back to Erik to take you through the medium term targets and what the Apnea licensing opportunities looks like from here. Erik.

All right. Thanks, Elisabeth. So our medium term ambition is unchanged. And I want to say that clearly, given the quarter we just reported. On capital return, 40 to 60% of profit after tax are paid out to shareholders. The dividend of CIEC 0.53 per share for the 2025 financial year was approved at the AGM on the 13th of April, 2026. On growth, we retain the ambition to double revenue over the medium term. It's driven primarily by the B2B sleep apnea and tech licensing. on profitability and EBIT margin of at least 25% per year. And that should be measured through the cycle. So these are through cycle targets and Q2 sits below the profitability level. And as you notice, there is also a lot of non-recurring items. However, the targets reflects where we expect the business to operate once the B2B ramp up and the Apnea investment phase are behind us. I just want to close with the outlook. So the picture for the second half is relatively clear. We still expect full year revenue to decline, but we expect the rate of the decline to moderate in the second half as B2B revenue grows from being agreements that are already signed into converting to revenue. In Q3, we expect B2B revenue to exceed 9 million SEK. That would represent around a 30% year-on-year growth, and that is before we add any new contributions from contracts that we haven't yet signed. On profitability, we continue to expect a reported EBIT margin of around 5% for the full year, with the adjusted margin around 9%. And on sleep apnea, our ambition for US regulatory approval in 2027 remains unchanged. The next step is that the board will decide on the scope of the study and the extension of the study. So despite the challenging consumer environment, the direction of travel is crystal clear for us. The decline should moderate, B2B is becoming a more meaningful contributor, and we continue to invest behind opportunities that we believe can drive the next phase of growth. And with that, Elisabeth and I are happy to take any questions that you might have.

All right, so let's see. We have a question from Jessica Grunewald at Red Eye. With the sleep apnea study needing expansion for statistical significance, was this a design flaw in the original study or a population enrollment issue? And does it change your confidence in the underlying technology's clinical performance?

It's a very good question and I think this is the irony of everything. So the study that we have done, we carried out on time. The challenge we have is we don't know before someone takes the test if they have moderate to severe sleep apnea or not. And to file for the approval to FDA, we need two buckets of people. So one bucket of people that has been sleeping and turns out not to have sleep apnea. That bucket is full. The other bucket is people that has moderate to severe. There we lack a number of subjects to be able to file for the approval to FDA. We are, and this is where it becomes a little bit counterintuitive. The study has been carried out according to plan and on time. We started in April and we finalized it. We're wrapping it up in these days. The challenge we've had, and I have no other way to put it, then we've been a bit unlucky in the distribution among these people that has been sleeping. So that's what we need to do. It hasn't changed a bit my confidence in the underlying technology.

Okay, so another question from Jessica. Now that Altar holds 78.2% of votes and a new board is seated, how has your day-to-day mandate as CEO changed? More autonomy, tighter reporting lines, or a shift in strategic priorities from the previous board?

Well, I think it's too early to answer. I mean, currently we are in onboarding mode with a new board and we will see further on how things potentially might shift. But right now we're onboarding and no real change from the previous situation.

We have also one question from another person. Given Ans Group's scale, should we think of the one-year agreement primarily as a technology validation, or is there already a clear path to meaningful recurring revenue if the pilot performs well?

It's a very good question. So the pilot is of course for them to validate that, you know, there is a, how should I say, a relevant use case for the technology that we are offering them. We have a a commercial agreement for the pilot that it doesn't make a big dent in our top line, but there is at least something. And because that's very important for us, we don't just want to give away technology. That's not a commercial model. So we will during the pilot also discuss with them what would the next step be. So very similar approach that we took with UltraHuman. The better news with the pilot is that Ant Group or AFU, it's a very big player in the region where we are in current dialogues with other B2B tech licensing partners. It's not insignificant that we have signed Ant Group and AFÖ. It means quite a lot for the other conversations that we have. And that's why we were really eager to get this over the finish line.

All right. So those were all questions.

All right.

Thank you so much.

Thank you very much.