LIND RESEARCH
Research Comment | Premium Equity Research
SDK Licenses Deal Align With Our Long-Term Thesis
Today, Sleep Cycle (OM:SLEEP) announced that it has signed a multi-year SDK licensing agreement with a global IoT and Smart Home device brand.
As new revenue streams outside the regular app subscriptions play a core part of our investment thesis in SLEEP, we thought it was worth commenting on.
The details are relatively vague, but here are some quotes:
“This is a key step forward in proving the value our technology can bring beyond the mobile phone. By implementing our ‘Powered by Sleep Cycle’ strategy we can enable entirely new experiences in a future of connected devices through licensing our core technology to major hardware innovators and partners” - Erik Jivmark, CEO of Sleep Cycle.
and
“By making our world-leading sleep technology available to other players beyond the mobile phone, we can further scale our impact. We see this as an opportunity to take a position in the rapidly expanding sector of health-enhancing hardware powered by ambient AI that adapts to biological indicators with high value in sleep and respiration” - Peter Alsterberg, Chief Commercial Officer at Sleep Cycle.
So what does this mean? For now, it’s tough to put any number on it. We do not know the precise business model here, but we assume it involves a mix of fixed fees and mostly volume-based consumption. Which means that if the new partner deploys and uses the SDK a lot, it will lead to very profitable revenue for Sleep Cycle. The SDK was officially launched on September 30th this year.
The Shift That the Market Misses
We believe the current dull market excitement of SLEEP (an EV/EBIT below 5x can’t be called anything else) relates to the slowdown in subscriber growth; however, what is missed is the revenue diversification that is ongoing with the SDK revenue (Powered by Sleep Cycle), being just one of the initiatives.
In Q3, partner revenue surged 55% YoY and now accounts for 11% of total sales, underscoring the early success of the in-app partner promotion.
This is where the core pillars in our investment view of SLEEP that we released in September:
The market has overreacted to the slowdown in growth: We believe the share price decline is mainly due to decreased revenue growth. Most of the issues are more cyclical than structural and will revert to normal. The development of other sleep analysis/tracking apps backs this. Sleep Cycle has actually been gaining market share, not losing it.
New revenue streams: To address the slowdown in growth from paying subscribers, Sleep Cycle has initiated multiple new revenue-enhancing initiatives. The promotion partnerships, which opened up opportunities to monetize free users, generate new B2B revenue, and facilitate sleep apnea screening, hold the most substantial promise.
Buyback opportunity: Sleep Cycle holds a substantial cash position and should utilize that money in a buyback program. At record low valuation levels, this would yield tremendous value and also signal confidence to the market.
Today’s announcement further strengthens our confidence that the revenue diversification will materialize in the coming years and, by doing so, change the markets’ view of the company. You can find our full case write-up on Sleep Cycle can be here.
Disclaimer
This analysis represents the independent views of Lind Research and is based on publicly available information believed to be reliable, but no warranty is given as to its accuracy or completeness. Nothing herein is investment advice or a recommendation. We publish openly, and companies do not influence our conclusions. Lind Research may hold positions in securities discussed.
Analyst owns shares? Yes
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