Sleep Cycle delivered a Q1 report that was broadly in line with our expectations on both sales and EBIT, despite continued subscriber headwinds. The muted topline and subscriber growth reflect persistent weakness in the broader sleep health category on the App Store. However, we view the quarter as solid given Sleep Cycle’s ability to gain market share from competitors, highlighting strong product-market fit and execution.

<strong>Muted topline growth as expected – subscriber softness partly offset by market share gains</strong>

Sleep Cycle reported Q1 2025 net sales of SEK65m, corresponding to year-on-year growth of 2.3% (1.6% currency-adjusted), broadly in line with our estimate of ~SEK66m (2% below).

The paying subscriber base declined sequentially to 904k (918k in Q4 2024), 2% below our forecast of 919k. Management attributes the decline of 14,000 subscribers to softer market conditions and lower new customer acquisition during the quarter. ARPU came in at SEK272 (SEK270 FX-adjusted), in line with our expectations and down slightly y/y (SEK276 in Q1 2024).

CEO Erik Jivmark highlighted the continued volatility in market conditions that began in late 2024, with a general decline in the sleep health segment on the App Store weighing on the industry. Notably, however, he emphasised that Sleep Cycle gained market share during the quarter, underlining the strength of the product and brand in a contracting market.

<strong>Profitability in line – strategic investments weigh on margin</strong>

Sleep Cycle

* Limited product diversification, with heavy reliance on a single sleep analysis app for the majority of revenue.
* Operates in a competitive market with multiple players offering various sleep and health solutions, facing potential challenges from new entrants and innovations.
* Demonstrated some pricing sensitivity, with a price increase in 2021 resulting in increased churn, indicating potential limitations in pricing power.

* Strong recurring revenue model with subscription-based services accounting for ~90% of revenues, providing predictability and stability.
* Asset-light business model with low capital expenditures and negative working capital, enabling efficient scaling and growth with minimal reinvestment.
* Benefiting from secular tailwinds in the sleep-health industry, leveraging increasing awareness of sleep's impact on overall health and wellness.
* Established leadership position in the sleep analysis app market, with a strong global brand and presence in over 150 countries.
* Commitment to environmental sustainability and ethical practices, with initiatives to reduce environmental impact and promote user well-being.

* Stock price has not compounded by at least 10% since IPO, potentially indicating underperformance or overvaluation at listing.
* Absence of consistent dividend increases over the past 10 years, which may concern income-focused investors looking for long-term stability.
* Insufficient data to assess Return on Assets performance relative to industry averages, limiting comprehensive evaluation of asset utilization efficiency.

* Strong profitability with gross profit margin >40%, operating margin >20%, and consistent ROE >20% for five years, indicating efficient operations and competitive advantage.
* Solid financial health with current assets 1.5x current liabilities, low debt ratios, and strong interest coverage, suggesting stability and capacity for growth.
* Excellent earnings quality with efficient inventory and accounts receivable management, low one-time charges, and high operating and free cash flow conversion rates.
* Attractive dividend yield and growth, with payments well-covered by cash flows, indicating a commitment to shareholder returns.

* The CEO and senior management team have relatively short tenures, potentially limiting their deep understanding of the business and industry dynamics.
* There's a lack of gender diversity in leadership, with female representation on the board falling below the recommended one-third threshold.
* Management owns a relatively small stake in the business directly, which may not fully align their interests with shareholders.

* CEO demonstrates strong visionary leadership, with a clear long-term strategy and focus on innovation, balancing short-term performance with future growth opportunities.
* Management shows commitment to transparency, providing candid communication about both successes and challenges, and consistently presenting the same story and key metrics over time.
* The company maintains a lean, decentralized organization promoting self-direction and accountability, with efficient spending and empowered employees.
* Sleep Cycle has a well-defined strategic plan focused on leveraging its extensive sleep data to enhance user experience and drive growth, consistently delivering on its promises.
* The founder remains actively involved, holding a significant stake, which often correlates with strong corporate culture and long-term focus.

Sleep Cycle Q1: Estimates versus Actual
	Q1'25e	Q1'25a	Q1'24a	Diff vs estimates
Subscribers	919	904	893	-2%
Growth y/y (%)	3%	1%
ARPU	272	272	276	0%
Growth y/y (%)	-1%	-1%
Net sales	66	65	64	-2%
Growth y/y (%)	4%	2%
EBIT	17	17	14	0%
(%)	26%	26%	22%	0pp
Source: Sleep Cycle, Redeye Research

Initial comment

Muted topline growth as expected – subscriber softness partly offset by market share gains