Storytel AB (publ)

Welcome to Storytel Group's earnings call for the second quarter of 2024. My name is Johannes Larcher, and I am Storytel's CEO. I am joined today by Peter Messner, our CFO. We are very pleased with our performance in Q2. Thanks to the continued hard work by our entire team, we were able to achieve the best quarterly financial performance in the history of Storytel. And we are very proud to deliver these results at the end of a two-year transformation process that was intense and challenging, but ultimately successful. As a group, we are today very well positioned financially, operationally, strategically, and organizationally for the opportunities that lie ahead in the fast-growing audiobook sector and the new challenges that no doubt will also be part of our future. Behind our success over the past 24 months lies our hybrid strategy that combines publishing and streaming. We are convinced that this hybrid group strategy of being both publishers and direct to consumer distributors of content provides us with competitive advantages that can lead to superior performance. To reflect this strategy and the fact that we also operate our day-to-day business and organization according to this dual structure. We have, in the second quarter, updated our financial segment reporting, which now reflects our publishing and streaming business areas, and thus offers investors greater visibility, transparency, and understanding of our business. In the second quarter, we were laser-focused on continued and disciplined execution of our profitable growth strategy. we were able to meaningfully grow our subscriber base and cross the 2.3 million paid subscriber milestone. At the same time, we remained disciplined on managing CLV SAC to healthy levels and ensured that the quality of our base in terms of churn rates, engagement levels, and ARPU remained excellent. We also paid a lot of attention to the development of our gross margin in Q2. We are delighted that based on the quality of titles released by our publishing houses, the popularity of our in-house content is increasing amongst our audience, with positive impact on our cost of content. Also a priority in Q2, we continue to tightly manage our entire cost structure, seeking additional efficiencies and savings throughout our organization. In our efforts to further differentiate Storytel from alternative offers, the amount of original and exclusive content on our service has continued to grow. And we are very pleased with the standout performance some of these original and exclusive titles, such as My Brother in 75 Parts, have achieved. Original and exclusive content drives subscriber acquisition and increases audience engagement. And because this strategy is working for us, we will be doing even more in this area going forward. It is also worth mentioning that we introduced approximately 6,000 podcasts to our service in Sweden this past quarter. These podcasts cover 90% of Sweden's most popular podcast content and are now available for free and without a subscription required on Storytel. We are doing this for two reasons. to keep our existing audiences listening on our service for even more hours every month by now allowing them to get all their favorite audio stories on Storytel instead of using a different podcast platform. And two, to bring new listeners interested in podcasts into the Storytel ecosystem in the hope that eventually we can convince some of them to also become audiobook subscribers. One of the most significant developments in the second quarter was without doubt the introduction of a new set of product packages, updated pricing, and innovative promotions in the Nordics. Let me spend a bit more time on that topic. Our new subscription plans, the Flex Plan and Student Forever, along with the limited Premium for Life campaign in Finland, are tailored to better meet our users' needs and to enable them to stay engaged in our world of stories for even longer. Our users are both highly engaged and loyal, and we aim to reward their commitment with these new packages while also strengthening our offer and the attractiveness towards new subscribers. With the Flex Plan, subscribers can enjoy 20 hours of audiobooks per month. with any unused hours automatically rolling over to the next month. Flex is offered at an attractive, competitive price point. For example, in Sweden, it retails for 99 SEK a month. Our new Student Forever plan offers verified students in Sweden, Denmark, and Finland our premium 100-hour subscription package at half the price for as long as they maintain their uninterrupted subscription with us. even when they complete their studies. Similarly, our seasonal Premium for Life summer campaign in Finland offered all new subscribers the premium 100 hours per month subscription at 10 euros per month, half the regular price. This offer was only available for a short period of time and sparked significant interest from Finnish consumers. We believe it will create a cohort of churn resistant and profitable customers for Storytel Finland and will help improve our market position in the country. While it is early days and we anticipate to innovate further on product on pricing later in the year, we are confident that these initiatives will drive higher subscriber acquisition, long term engagement and retention on our platform. We are encouraged by what we've seen in the data since these packages and promos went live and will update on their performance later in the year. The second quarter of 2024 delivered the strongest ever financial results in the history of the group. Net sales were up 9% year over year to 924 million SEC. Gross profit margin improved 5% percentage points year over year to 44.2%. Our EBITDA performance was very strong, with adjusted EBITDA reaching 128 million SEC for the quarter. This is a 2.8x increase from Q2 of 2023. Our EBITDA margin also reached a record high level of almost 14% for the quarter. Operational cash flow, defined as EBITDA minus CAPEX, reached 87 million SEC. and our adjusted operating profit improved from minus 25 million SEC in 2023 to positive 62 million SEC in Q2 of this year. Looking at the performance of our streaming segment for Q2, we are pleased with the strong results. Our subscriber base has continued to grow. The quarterly average number of subscribers reached 2.29 million, and we crossed the 2.3 million threshold during the quarter. This represents an increase of 230,000 subscribers year over year, out of which more than a third came from the Nordics. In a non-Nordics core segment, we grew even faster and added 154,000 new subscribers, an increase of 21%. ARPU has remained stable, with a minor decrease of 2% year over year. As we optimize our business for growth and profitability, we make real-time decisions that balance subscriber growth and ARPU. And we are pleased with the ARPU levels we saw in Q2. As mentioned, our focus is on developing not just a large, but also a healthy and profitable subscriber base. And therefore, we carefully manage customer lifetime value versus subscriber acquisition costs. We feel good about how our base is developing. This is also evidenced by our paid churn development, where we reached another all-time low level in Q2. In terms of engagement, the key measure of long-term success in streaming, we closely track frequency and length of listening. And in these areas, we are also at historic high levels. In fact, our subscriber base today is larger and healthier than it has ever been. I'm now going to hand the mic to Peter Messner for a more detailed discussion of our financial performance.

Thank you very much, Johannes, and I'm happy to walk through some further details now on the group's financials. As Johannes just mentioned, Storytel adjusted its segment reporting this quarter to better reflect the strategy and dual structure of our two business areas, streaming and publishing. All the segment financials on this and on the next slide and in the report are adjusted, which means they exclude any items affecting comparability. Let's start with the streaming segment. That's the segment reflecting the financials of all audiobook and e-book streaming services operated under the brands Storytel, Mofibo and Audiobooks.com. Geographically, Storytel provides KPIs for three regions. The Nordics, which are the markets in Sweden, Denmark, Norway, Finland and Iceland. non-Nordics core, which consists of the Netherlands, Poland, Bulgaria, Turkey, and all of the operations of Audiobooks.com, and then the rest of the world region, which are all remaining former expansion markets. The total net sales in the streaming segment increased by 8% to 834 million SEK. The revenue in the Nordics region as a contribution here increased by 5%, which was based on a subscriber increase of 7% and a slight upper decrease of 2% year-on-year, whereas ARPU increased versus the first quarter this year. The revenue contribution from the non-Nordics core region increased by 20% and was based on a very strong subscriber increase of 21% and an ARPU decrease of 1% year over year, whereas ARPU increased versus the first quarter this year. And finally, the revenue from rest of the world region decreased slightly by 2% based on a subscriber decrease of 3% and a flat ARPU development year on year. The adjusted gross profit for the streaming segment increased by 13% to 347 million SEK, reflecting a gross profit margin of 41.6%, which was two percentage points higher than in the second quarter last year. Operational expenses overall significantly decreased, such as the general and administrative expenses, which decreased by 51%, which led to a significant increase in adjusted EBITDA contribution from the streaming segment of 96 million SEK, an increase of 69% as compared to the second quarter last year, and reflecting a margin of 11.5%, which was up 4.2 percentage points from last year. Finally, the adjusted operating profit contribution from the streaming segment increased by almost 200% to 67 million SIG. Let's turn to the next slide and the publishing segments then, which reflects the financials of all our publishing houses within the group. That is, Newstead's publishing group, Linden Company, Gumerus, and Peoples, as well as our global digital audio publisher, StorySight. The publishing segment further also includes external sales from content productions. Total net sales in the publishing segment increased by 16% to 263 million SIG, of which the external sales increased by 13% to 141 million SIG, and the group internal sales increased by 18% to 122 million SEK. As can be seen in the bottom left chart here on this slide, the internal sales show a more stable and increasing development, while the increase in external sales over time is subject to certain seasonality patterns, in particular in print sales. Adjusted gross profit increased by 97% to 82 million SIG, reflecting a gross profit margin of 31.3%, which was 13 percentage points higher than in the second quarter last year. As in the streaming segment, the total operating expenses in the publishing segment significantly decreased, which led to an increase in adjusted EBITDA contribution from the publishing segment of 61 million SIG. That is an increase of more than 200% as compared to the second quarter last year and reflects a margin of 23%. Both the gross profit and as a result also the EBITDA margins follow certain seasonality patterns due to different gross profit margins in external print versus digital sales and also inventory write-downs over time. Overall, the increase in margins are the result of the many operational improvements that have been done in our publishing houses since last year. The operating profit as a result from the publishing segment turned positive as compared to last year and was now 27 million SIG. Let's turn to the next slide and a closer look at the total group's income statement. As Johannes outlined earlier, net sales for the group grew by 9% year-on-year to 924 million SIG. And as just talked about, the growth was driven by the solid performance in both the streaming and the publishing segments. The adjusted gross profit grew by 22% as compared to the second quarter last year to $409 million, which is a gross profit margin of 44.2%. It's worth to highlight the group's higher gross profit margin as compared to the individual gross profit margins of the two segments, reflecting the synergetic advantage and the value of owning and operating both streaming and publishing businesses in the group. When taking a closer look at the group's cost structure, excluding any items affecting comparability, then we see that sales and marketing expenses amounted to 216 million SIG and stayed more or less flat year on year, which reflects the increased marketing efficiency in the streaming segment and the cost efficiency measures taken in the publishing segment. Technology and development expenses of 54 million SIG, as well as the general and administrative expenses of 77 million SIG, decreased by 15 and 10 percent respectively, and those reflecting the cost optimization measures that have been taken in the group since the third quarter last year. The adjusted operating profit improved significantly and turned positive to 62 million SEK. Adjusted EBITDA improved by 178 percent to 128 million SEK and represented an EBITDA margin of 13.8 percent, which is up 8.4 percentage points from last year. The items affecting comparability during the second quarter amounted to minus 15.5 million SEIK in total, of which minus 17.3 million SEIK affected EBITDA. Of that amount, minus 9 million SEIK relate to the divestment of the Finnish publisher Ola and Company, and minus 6.4 million SEIK related to the group's share-based incentive schemes. There was a positive amount of 1.7 million SEIK affecting the operating profit that related to an adjustment of an ISC for depreciation that was done in the first quarter of this year. The ISEs during the second quarter last year were minus 4.2 million SEK as a comparison and related to the group's share-based incentive schemes. Let's go to the next slide and the group's cash flow statements then, where we see improved cash flow generation as a result of the disciplined strategy execution and cost reduction measures. In the cash flow statements, the adjustments for non-cash items primarily relate to depreciation and amortization, currency exchange movements, and changes in provisions. The cash flow from operating activities before changes in working capital increased by more than 300% to 106 million SIG. The change in working capital was minus 29 million SIG and an effect of the reorganization that was rolled out in the first quarter this year, as well as usual seasonality on receivables and payables. The cash flow from investing activities reflects our investments into content, product and technology and was minus 44 million SEK. And the cash flow from financing activities was minus 66 million SEK, including a 50 million SEK repayment of a term loan, which is now fully repaid. All in all, total group cash flow for the period was minus 32 million SEK, again, including the 50 million SEK repayment of the term loan. With that improved cash flow generation, let's turn to the group's balance sheet, which shows a solid and overall improved financial position. There are no major movements in the intangible assets as compared to the previous quarter, which are fairly stable now at 1.9 billion SEK. Cash and cash equivalents were 315 million SEK. And total assets amounted to 2.9 billion SEK and the equity to asset ratio was 44.7% and slightly improved versus the 42.9% at the end of March this year. As mentioned before, during the quarter, 50 million SEK of a term loan was repaid, which is by now fully repaid, which reduced financial debt to 650 million SEK. Those 650 million SEIK relate to the group's revolving credit facility, and that was reclassified during that quarter from non-current to current. In February this year, Storytel extended this RCF until the 2nd April next year, 2025, and also reduced the total available facility to 750 million SEIK. We have commenced negotiations with financial institutions in order to refinance the existing RCF. Turning to my final slide then, which shows the significant improvements in the group's operational cash flow and leverage ratio. The operational cash flow is defined as EBITDA excluding any items affecting comparability less any operational capital expenditures and was 87 million SIG or 9.4% of revenues as compared to 1 million SIG in the second quarter last year. As mentioned before, these operational capital expenditures reflect investments into, in particular, content, but also product and technology. Our net interest-bearing debt was 335 million SIG at the end of the period and represents a leverage ratio, as compared to the last 12 months of adjusted EBITDA, of 0.8. Storytel has significantly deleveraged during the past 12 months, more than halving its leverage ratio from 1.9 at the end of June last year to the 0.8 now. During those 12 months, a total of 250 million SIG in bank debt has been repaid, of which 200 million SIG related to a term loan that is fully repaid. And with that, I hand back to you, Johannes. Thank you, Peter.

As you know, this is my last earnings call as CEO of Storytel Group as I prepare for my exit in September. From October 1st, Boodle Ericsson Torp will be leading Storytel as our new CEO, and I wish her all the best as she prepares to take the business forward. I will be actively assisting with Boodle's onboarding and the transition of responsibilities. As I look back on my time at Storytel Group, it is clear what incredible transformation this company has undergone, and I feel very grateful and fortunate to have been part of this journey together with the entire Storytel team. Over the last two years, we have continued to grow our subscriber base and revenue while also achieving significantly higher levels of profitability, and we are now profitable on the bottom line. This success is mainly driven by the following. One, much deeper collaboration between our publishing houses and our streaming service as part of our hybrid group strategy. Two, implementation of a highly successful streaming strategy that is centered on service differentiation, marketing excellence, user-centric innovation, and higher operating efficiency. As a result of these initiatives, the company is now a healthy and profitable business in excellent condition. Compared to when I started, we are 13% higher in terms of paid subscribers and 18% higher in terms of group revenue. Adjusted EBITDA has increased by a factor of 10x during this time, and EBIT and profit are now firmly in the black. I am very proud of our team. Without whose hard work, great skill, resilience, and dedication to our mission, these results would not have been possible. I look forward to cheer them on from the sideline as they accomplish amazing things together with Boodil going forward and the company embarks on its next phase. Finally, no earnings call would be complete without a quick comment regarding guidance and midterm financial targets. Our solid second quarter results mean that we are tracking well year to date relative to our guidance, which remains unchanged for 2024. With continued disciplined execution of our strategy, we expect to grow 2024 group revenue by around 10% to deliver above 13% in adjusted EBITDA margin for the full year and operational cash flow of above 8% of revenue in 2024. Regarding our midterm outlook for the period until 2026, we likewise maintain our previous guidance. We expect 2026 group revenue to be around 4.5 billion set driven by our streaming business, which we expect to grow at roughly 10 to 12% annually. We expect to deliver significantly higher than 15% EBITDA margin and see the business running in steady state at 20% or more EBITDA margin. Lastly, our operational cash flow will reach more than 10% of revenue by 2026. And with that, thank you, and over to you for your questions and comments.