Sleep Cycle reported sales of SEK65.9m in Q3 2024, translating into a growth rate of 8.4% y/y (currency-adjusted growth was 9.9% y/y), facing tough comparables both on a y/y and q/q basis. This was roughly in line with our estimate of about SEK67m (2% lower). Both subscribers and ARPU grew y/y, supporting the good underlying growth. The subscriber base grew by 17 thousand q/q and amounted to 915 thousand (up by 28 thousand y/y), while the ARPU came in at SEK280 (up by 2% y/y). FX effects had a SEK4 negative effect on the ARPU, while revenue managed had a SEK9 increase. However, we are not focusing too much on near-term ARPU, as it may be a bit volatile while Sleep Cycle re-engages previous and converts free-tier customers with discounts.

Sleep Cycle reported an operating profit of SEK21m (32% margin), higher than the financial target of about 25% for the full year of 2024 and above our estimate of 30% (SEK19.2m in absolute terms). Based on the strong performance during the first nine months of 2024, the guidance for the 2024e EBIT margin was raised from around 25% to around 28%. Operating cash flow was SEK20.2m before changes in working capital and SEK11.8m (compared to SEK16.2m in Q2 2023) after those changes. It’s important to note that payments from Sleep Cycle’s platform partners are not received on a consistent monthly schedule, leading to variability in cash flow (changes in working capital) from quarter to quarter. Hence, we anticipate a strong rebound in changes in working capital for Q4.

Following the report, we made minimal adjustments to our estimates, mainly aligning our EBIT margin estimate with the raised guidance for 2024. The changes do not impact our valuation, which continues to be SEK21-85, with a Base case of SEK55 per share. The sell-off (uncalled in our view) follwing the Q3 report may present an attractive entry point for investors in the short/medium term, with Sleep Cycle trading at an EV/EBIT 7.6x and EV/FCF 7.3x based on 2025e.