Q1 2020 Earnings Call

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Welcome to Spotify is first quarter 2020 financial results question and answer session.

A copy of the company's shareholder letter issued premarket open today is available on the Investor Relations website investors that Spotify Dot com.

This call is being recorded an archived replay will be available on the IR site. After the end but includes please note. We will conduct a question answer session on the webcast. If you would like to ask the question. Please visit the Spotify Investor Relations website to access the webcast link.

I'll now turn the call over to Paul Vogel, Chief Financial Officer, You May now begin your conference.

Great.

Thank you and welcome to Spotify is first quarter 2020 earnings conference call I Hope I want to staying safe during these unusual times.

As is the case with just about everyone. Our team will be hosting the call entirely remotely our CEO Daniel like is participating from Stockholm, and I want My home office in New Jersey.

Turning now to the call, we'll start with opening comments from Daniel and after the remarks, Daniel I'll be happy to answer your questions.

You for the quarters. It we will be taking questions exclusively through slide two questions can be submitted by going to slideshow dot com S. L. I'd O dot com and using the code hashtag Spotify earnings.

Analysts can ask question is directly to Cyto and all participants can then vote on the questions. They find the most relevant.

We hope this keeps the call as efficient as prior quarters, but increases the transparency around which questions get asked and in what order.

For some reason you don't have access to slide you can email investor relations at IR at Spotify Dot Com and we will add your questions.

Before we begin let me quickly cover the safe Harbor. During this call we will make forward looking statements, including projections are estimates about the future performance of the company.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ because of factors discussed on todays call and our letter to shareholders and in filings with the Securities and Exchange Commission.

During this call we refer to certain non IRS financial measures reconciliations between our IRS and non IFRS financial measures can be found in our letter to shareholders. The financial section of our Investor Relations page and also for US today on form 6K, and with that I will turn it over to Daniel.

All right hi, everyone and thanks for joining us before jumping into our quarterly results I want to acknowledge these extraordinary times that of profoundly impacted the world around us on behalf of the entire Spotify team I want to express our deepest appreciation to the healthcare workers. The first responders around the world for keeping a safe.

I also want to acknowledge all of the creators whose livelihoods had been altered from the artist. This music continues to inspire us to the pod casters keep us entertained and informed.

We know that many creators with touring and live shows canceled the pandemic its broad thinkable levels of uncertainty incident of lives.

And like every other company, we're operating with a new in a new reality and its of course premature to say when things will return to more normal or what the normal well looks like.

Despite this uncertainty Q1 was a strong quarter for spot fine we continue to see impressive user growth up 31% from last year. In fact, we saw a faster growth in all four of our regions in the first quarter of 2020 compared to Q1 2019.

And we met our guidance by nearly every measure growing both our subscribers and they use.

The one exception was advertising revenue, which is a very small portion of our total revenue.

Obviously, a loss in AD revenue is something that every media company is experiencing during these challenging time. So in some our overall business is less impacted than many others.

I guess consumption driven by triple digits during the quarter compared to just a year ago. It was also our biggest quarter ever for organic podcast creation and while many companies have had to adjust their output. During this crisis almost all of our original an exclusive either maintained or increased their pace of new releases in response.

Audience demand.

For example, our original podcast signs Zs and festive sloshing have both doubled their weekly releases and we also launched a new daily news podcast in Germany that has already become the second largest show in the country and regularly ranks in the top 20 worldwide.

And we've been encouraged by the wave of creativity in new podcasts creation this quarter more than 70% of new podcast on spot if I were created with anchor and within our own ecosystem.

With 286 million monthly active users and 130 million subscribers, it's clear that audio and Spotify continue to play an important role in our users mice.

Our solid performance is the result of the audio first strategy that we put in place just over a year ago and were up 31% in both EMEA, you and subs year over year.

And while we saw some minor impact from Kobin 19 during the back half of the first quarter EMEA, you and subs remained in line with our forecast and held steady in hard hit markets like Italy, and Spain, we saw more of a decline in daily active users and consumption, but over the last few weeks, we've seen listening start to rebound in a big wave.

In this environment, we've had to suspend what we normally believe and think differently about our business. So for example, when we saw consumption starting to decline. We would have assumed that may use and paid subscribers would be negatively impacted but that wasn't the case in fact, both new and reactivated Emeas group.

Substantially even during locked down periods in major markets and we believe this is a testament to how engaging our platform and ecosystem our to our users.

And last year as you all know we outline of vision to be the world's largest audio platform and we've made significant progress.

We now have more than 1 million podcast on the platform and where the number one audio service for podcasts in dozens of countries around the world and quickly gaining ground where were now.

And I know many are wondering how we will continue the weather the storm with so many unknowns. There are some questions. We simply can't answer at this point.

But I can say that I'm confident that we will continue to be in a position of strength. When this is behind us.

And thats because of our model our scale and our superior user experience and of course, our content pipeline.

These are the fundamentals of fueled our success and we will continue to do so in the future.

When I look ahead, both short and long term I'm always thinking about what Spotify is role within the larger ecosystem.

And while most focus is on competition between streaming services. We continue to be focused on the billions of users that are listening to linear radio. The 20 year trend is that everything linear dies and on demand wins. This is a trend that we suspect will be accelerated by the Kofi pandemic.

Time at home has moved people out of their cars, requiring them to shift or listening behaviors and that's when they discover streaming.

And spot refers to best position to capitalize on this and because we offer a personalized and on the demand experience they end up state.

So in my mind, our competition is actually those learned and long held user behaviors for us it will always be about capturing the share of time listener spent elsewhere and prove out their time is far better spent with us.

And we see this happening now on our platform as routines like commuting to work and go into the Jim were disrupted and consumer started the form new habits.

And of course ubiquity of our platform was a true at Ventas for Spotify and because were available over 300 devices across 80 hardware brands were accessible to users even after listening behaviors have changed.

For example by listening in the cars declined listening on gaming console is exploding and we continue to see increase listening on home speakers and through Cds.

And on the music fronts, we were pleased to reach a long term licensing deal with Warner music that covers all of our existing markets and paves the way for us to enter new ones.

We also delivered some of the years most popular music releases to our fans. The weekends album after hours had the biggest attribute of the year, so far and do a leap US album future nostalgia broke three spot if I records. When it was released in late March fans are craving, new music and we expect to see more artists and label to move forward with their plan.

But leases.

But it's not just about delivering relevant content in the midst of an economic downturn Spotify free tier and freemium model are more valuable now than ever.

It's important to remember that just over 60% of our paid subscribers come from our free tier so growing the top of the funnel has always been a priority for us.

And with more and more people dealing with the financial stress. Our free service provides a bridge to ensure users don't have to give us access to their favorite podcasts and usage impact over the last few weeks, we've seen an increase in that number of users coming to the platform for our free service.

Many of these listeners are returning to Spotify from lapse accounts and summer joining from other streaming providers as you know the majority of our competitors do not have a free tier and that of course make spotify more appealing option in this environment.

This should allow us to expand the pool of subscribers available to us as the economy recovers.

No one knows how long this will last or what the long term implications will be.

But we're very optimistic because of the many positive indicators, we continued to see in our business and our strong cash position and our strong belief that we will continue to grow and gain share.

There have been many unknowns and for prices throughout this crisis, but I'm really proud of our team and police by how well our business has responded I will now turn it over to Paul to open the call for questions.

Great. Thanks, Daniel and again, if you have questions. Please go to slide or dotcom hashtag Spotify earnings and will read the questions in order to they come in with.

With respect to people voting up their preference for questions.

The first question comes from Mark Mahaney.

Are you thinking about long term gross margins for the sub and add segments given the allocation of all podcast content costs to the AD segment.

Hum So there's really no change in thinking there we mentioned in the shareholder letter.

That we made an adjustment from an accounting perspective in terms of how we allocate cost for the podcasts and business.

Historically, we had allocated across both free and premium.

All of the revenue associated with podcasts and all the costs associated with podcast.

We'll both be in our AD supported business it doesn't in any way change our view of podcast or the importance of podcast for the premium business with respect to engagement with with respect to consumption with respect to users. This is just a decision we made from an accounting perspective. So it has no impact on our consolidated gross margins, we manage the business for a consolidated gross margin.

And Oliver expectations in terms of how that will change and improve overtime.

This has no impact on that whatsoever.

The next question.

Also for Mark could you elaborate on the gross margin improve its stemming from.

The.

Groups.

So there or.

The skip moves.

Stemming from the core royalty component due to product mix does this mean gross margins benefited from the shift towards podcast.

No what that refers to is.

Product mix can impact the gross margin a couple of ways. One is when premium is slightly more than ads is relative to our forecast because premium has a higher gross margin. It can impact the gross margin positively that way.

It also means that sometimes the mix of products within our premium relative to our forecast with respect to standard and family and student that could also impact the the reported gross margin so thats what that as a reference to.

Next question comes from Ben Swinburn.

To provide some color on the 500 basis points drag to advertising gross margins called out in the letter as unusual as advertising revenues flow can you help us think about the incremental margins and whether minimum guarantees will increase the proportion of revenue declines that fall to gross profit.

Yes, so the 500 based weight unusual.

There is oftentimes the quarters can be lumpy or we had some onetime items in the quarter, they particularly hit the.

The advertising gross margin, they're not going to recur. So we try and call. These things out if possible. So thats what that is related to its basically some onetime issues around publishing that will not will not happen again.

And with respect to advertising and a decline on gross margins.

So we have model. This out we don't think theres much of a risk right now to our forecasted advertising growth margin from even further slowdown it advertising, which we're obviously not forecasting different from what we put in our guidance, but we don't see much of a risks to to gross margins for further slowdown in advertising with respect to.

And any guarantees.

Next question goes and Jessica Reif Ehrlich in regard to new ordering music agreement can you discuss key changes, including health podcast revenue will be contemplated in length of the contract et cetera.

Yeah, obviously, we can't comment on the specifics what I can say still up level. The conversation the focus for these renewals were really around establishing the marketplace, establishing podcasts and the shift from music to audio and obviously, we wouldnt have done the deal if we didnt were happy with the terms.

That we agreed on and this is a multi year deals that covers all existing markets and new markets as well. So we're very pleased with that.

Great. The next question what's embedded Swinburn.

Can you spend a minute on the lower revenue outlook, you mentioned FX and AD sales of the biggest drivers with FX the largest that almost half that suggests a lowered outlook for advertising is a minority what are the other factors all premium ARPU.

Yes. So FX is the largest we mentioned it's about half. So it's just under half of the of the movement that we have some pretty major currencies that have year over year down closer to 20% relative to the euro.

We've seen it improve a little bit since the forecast was finalized.

But not too much and so that's a that's still a pretty good number.

Yes ads is.

Less than that it's the next biggest component.

It's a pretty sizable not.

In terms of expectations for Q2, we expected to get better throughout the year, but we don't have a significant ramp up in adds beyond.

Beyond where we are in Q2 and then there is a small component on the premium side that's related to a couple different things.

One is a little bit in terms of the timing of the promotional cadence, which can always impact a little bit FX is in.

Packaging premium as well and then product mix is having a little over the impact. So again in order FX is the largest all almost half advertising is next at a pretty sizable amount and then the remainder is a little bit on the premium side.

The next question comes from Doug and myth, you're maintaining your outlook for the two sided marketplace can you talk more about early progress and how it's impacted in the current environment given fewer new album releases and tours and what gives you confidence and maintaining your outlook there.

Well overall, just again as you could see from the deal with Warner Music, We're very happy with all those relationships that we have with big and small.

Label partners.

And again I think the notable call add on to have in this quarter was the weekend who had.

A very very strong release, a number one.

It's a lot of the records that use our marketplace tools. So we continue to be very very bullish about that and I would suspect us coal would place out.

You know music streaming as a category will not be EPS impact that as many other categories. So that bodes well for labels and then to specifically related to our marketplace strategy to direct ROI that we have on our marketplace products is much better than other.

Mediums that labels and can market in so we suspect that we'll have a positive impact.

Great next question comes from Rich Greenfield.

With artist sheltered.

With artist sheltered you will likely be getting fresh new music in the months ahead, how do you think about that impact and how has the mix shift in listening frontline verse catalog shifted in recent weeks.

Yeah, Weve seen a bit of a shift in terms of consumer behavior. Obviously, we've mentioned before card usage is down in home usage is up with more than 50% of the quarter again trend has been much more instrumental music much more classical music shale music has been up.

That may skew towards catalog and little bit more the frontline. We've also seen many artists.

Not releasing their their leases.

I would like to think with the belief and that weekend being such strong releases that more artists will come back to releasing new songs.

As well.

Overall on our service clearly in Q1, we had a great growth, we expect that trend to keep happening. So it's not a huge impact that we havent seen us many new releases in the first quarter, but I.

I think you're probably right that we should see a lot more new music come out in Q2 in Q3.

Which will be great.

The next question comes from Michael claim.

Why not be more active in offering live virtual performances as a way to connect artist with their fans. The seems like an opportunity to leverage your datadvantage to provide a service that artist would find extremely valuable right now any reasons why Spotify is it more engaged here.

Well I think again the macro trend here.

Isn't really lives I think the big macro trend is linear to on demand and of course live they see component of that but it's still a relatively small component. So the investment that we're making is moving linear to on demand and thats been the big trend for the past 20 years, just having a linear moves to on demand.

And what we're spending a lot of time on is making sure that we are reflecting culture and the realities of consumption habits shifting so as an example, we launched an at home hub down we are responding with more wellness content helped content.

Morning News.

And you've also seen some of our original podcast increasing their outputs S.

Pure reactions to this and I would suspect the that's going to be a bigger story of the overall consumption trend both.

Going forward as well listen this moment.

Next question comes from Richard Kramer.

Dive the I FDI Global music report showed a decline in the growth rate a streaming revenue in 2019 with multiple offers often bundled competing for attention. How can you be sure. We are not reaching saturation in key developed the markets.

Well as outlined in my opening remarks, we're actually seeing an increased growth rates relative to Q1 2019. So we've accelerated our rate of growth in all of our territories, including North America and Europe.

So we're very happy about that that does not indicate a sign of a slow down so were very encouraged and I would like to remind people again, if we just op level here the big opportunity for us over time as to billions of people that are currently listening to radio if you compare to streaming wind.

Hundreds of millions of consumers globally on streaming so we think theres plenty of growth left he had to both in mature markets and as well and developing markets like Asia.

Another question from Richard Kramer in the 2008 nine.

Global financial crisis radio advertising was particularly badly hit.

That was a target market for your efforts and adds in pod guess, how does the current situation effect plans to monetize podcast content will ads growth permanently lag growth and subscriptions.

I would just like to remind people again net adds is very very small portion of our business. It's about 10% of our overall revenues. So to the extent that were impacted by ads were likely a lot less impacted to many other businesses.

The long term we believe this is a great opportunity for us.

Yes.

The trend line of moving from linear to on demand will likely be accelerated by the cobot 19 crisis.

And we suspect that advertisers will shift from pure reach two or more.

Maestra bold AD formats of which are AD formats are obviously, a lot better compared to analog AD formats. So.

Our suspicion both on the advertising fund as well as the consumption front. This that this of will play into the tailwinds of what's already been happening.

Of linear moving to on demand.

And then with respect to the podcast part of the question that we actually feel pretty good about podcast podcasts actually or the stronger categories heading out of Q1 heading into Q2, so there seems to southern log demand for for podcasts advertising.

Next question comes from Ross Sandler of Barclays.

Twoq premium sub guidance it doesn't look like it as much impact from cancellations. You noted in the letter can you talk about how the recession is impacting or not being a cancellations and overall sub cadence.

Yeah, so cancellations active cancellations or actually a pretty small part of overall churn and so if you take a step back your churn in the quarter was right in line with our expectations and we didn't see any impact from from covered in the churn numbers.

It ticked up just a teeny bit sequentially. It was down about 70 basis points year on year. So the churn number overall in Q1.

Was really good and was inline with our expectations.

The biggest driver for us of churn is still payment failure, and so thats something were working on to try and improve.

But.

But in general we haven't really seen much as I said cancellations active cancellations are still pretty small.

And that's number one number two is a while we did see.

Some pickup towards the end of March we've seen some pretty nice improvement in that antibodies stages of of April so.

It's obviously factored into all of our numbers and guidance, but not much of an impact at this point.

Next question of some Eric Yes.

Can you provide granularity on how the marketing subscriber acquisition funnel continues to evolve, especially it impacts you are seeing from the current environment have you adjusted your approach to other trials prospectivity or trying to stimulate reactivations.

Yeah. Overall, just again growth has been very very strong and the growth rate is accelerating compared to Q1 2019, we're very pleased with that.

What's happening is obviously, there's been a bit of a platform shift mix, where more and more consumption is happening in home.

Rather than in the car I suspect that changed just some of the tactics that we will pursue and just the channels were reaching consumers in.

On the marketing side, and then mid to long term that.

Ends up being an opportunity to remind users as we start easing up on.

Some of the restrictions to to promote people to come back to the car and all the amazing content that fits really well daily commute et cetera, like the daily drive.

Play list that we have on our service too. So overall, we feel very very good about the slate of content that we have and that there is content for pretty much every moment of a user's lives and our job from a marketing perspective is to remind them of that and remind them of all the amazing content thats being created everyday on quantify.

And before we move on I've been told Mike.

Audio is little choppy, so I apologize for that hopefully I can I can improve it. So if there is.

Any questions don't get answer we will have a replay of the.

Of the call afterwards, if anything is unclear.

Our next question is from Chicago to non.

Well Spotify premium change in pricing in any way in the upcoming month years.

No again, our primary strategy is growth as we said before rather than maximizing revenue and that's due to the fact the depth of who we have we see this amazing opportunity of moving from radio to on demand.

Audio and that's a trend line that we're trying to capture and that's what you're seeing this go after we have made small pricing experiments in some of our more mature markets and obviously due to inflation you've seen us adjust pricing.

In some territories to the response from those have been very positive, but it's not something that we're focusing on in the short term, but it's definitely encouraging to see that we have that opportunity.

For.

When the economy improves and we feel that's the right tradeoffs to make.

The next question comes from.

Matt Thornton of Suntrust.

Just 2020 guidance contemplate any meaningful new market launches E, South Korea and or Russia.

Yes, so we've talked about both Russia, and South Korea as being markets, we want to we want to be it and nothing has changed there all of the guidance and forecast we give you always.

Include our expectations of if and when we will launch and new markets.

So while we have nothing to announce at this point you should know there's definitely two markets that we are focused on and all the guidance that we've provided includes the timing of any.

New market launches, whether it be south Korea, Russia or anything else.

The next question comes from Doug and with can you talk more about podcasts one how that's driving higher deal you may you too early progress with exclusives and three your appetite for more acquisitions in the current environment.

Yeah, I mean overall just to up level. It was about a year ago since we announced our shift from the music to our audio first strategy.

At that place, we were about a quarter a million.

Or so and our podcast catalog, we've grown that by three extra over a million podcasts now we were a small player and podcast that we're now more than number one in more than a dozens markets.

Growing very fast and the markets, where we're not number once we're feeling pretty good about that.

In terms of user behaviors, where we are seeing is that podcasts uses are more engaged overall, they do listen to more music aswell and in terms of our originals and exclusives, we're seeing some pretty good progress we're still learning how to best market those shows.

Whether it's all out exclusives, whether its windowing. So we're experimenting a bit with that were experimenting with helped to market. These shows to it I suspect that will be down to different audiences assumption behaviors of those audiences you should expect that to to play out in 2020.

Of more experimentation, but we're definitely doubling down based on the early signs.

We're seeing and I think in as related to more acquisitions, we keep on doing more deals and podcast based on what we're seeing so if the macro environment.

Means that there will be more advantageous deals to be done we will for sure look into that.

Great next question from Heath, Terry at Goldman Sachs.

You have anyway to quantify what impact an increase in shared listing may have had on reported dia use or engagement.

Do you believe an increase in shared listening impacted churn positively or negatively.

We don't have any reliable way of impact in share lifting while we can't say, it's obviously into home. There's more share listening then it is on mobile devices and so it may have played a part in the EU and engagements that said.

The overall churn was obviously in line with earlier expectations. So.

We haven't seen a big impact on churn numbers and I would just said we as we mentioned this that the DSD you'd Amy you ratio in in Q1 of.

Of 2020 was above where it was in Q1 of 2019 so.

We feel really good about the trends of the deal you David you ratio.

Next question has some Jessica in large music markets that have remained largely physical such as Japan, and Germany. How was shelter at home impacted penetration also can you can you provide color on India and some of your other more recent market entries.

Yeah, we don't breakout specific markets, but what I can say, it's two observations. So one is obviously that our user growth rate year over year is increasing.

And that is true in established markets as well as expanding geographies.

And then what I believe we will see is just the trend line of linear and physical will move to on demand and that trend line will be accelerated due to this pandemic as more and more people are learning you habits, and new experiences and I think they will find that streaming.

Just a much more beneficial.

Better user experience.

So we we suspect that tejas, new audiences about streaming and and that would likely have an uptick in long term retention as well of those users and then.

My only remarks on India, specifically, it's obviously would finalized Warner.

Deal and we have added some notable other licensing deals. So we've improved catalog greatly in India and.

I can certainly see from social sentiment at least that that's having a very positive impact on users loved for Spotify and India.

Next Wesco, some Michael Morris Guggenheim.

Expand on gross margin outperformance comments, what specific customer product mix behavior drove the difference also what drove lower streaming delivery costs and is that sustainable.

Yes, I mentioned before there's a number of things that can impact gross margin in any one quarter geographic mix product mix.

And so when you have.

Some quarters, where as I said premium is a is more than advertising premier as high gross margins that can help and the mix of products with in premium can also impact to gross margin.

In terms of relative to our expectations.

So that would be one and then on the lower streaming delivery, we've sort of been on this path for the last couple of quarters, where we've gotten some efficiencies and streaming delivery.

I think the long term trend is we'll continue to see streaming delivery improved I think in the near term we've seen a lot of those those benefits over the last couple of quarters. So it's really been just getting efficiencies.

On the on the delivery in general, but I think thats sort of improvement will moderate over the next couple of quarters.

The next question comes from Mark Mahaney, what is happening with premium sub churn trends in the June quarter. So far.

Yeah, we're not going to give any.

Really updates on could you other than to say what I already said, which was churn was in line with X expectations in Q1.

And we feel really good about how we ended Q1 in terms of the impact of of code on cancellations or anything related to that so.

If you look at our our guidance and our expectations for subscribers both for Q2, well after the full year, we haven't really changed any of those expectations.

So hopefully that should be indicative of how we are seeing the current environment.

The next question comes from Eric that you'd be us.

Because of you changed in terms of video content as an element of your broader engagement strategy and to support artist looking to reach fan and fans and promote their content in the current environment.

Not really we continue to see video be important in terms of compliment, but I I really do want to focus on just up leveling. The conversation. We believe video is something that a lot of players around in the marketplace is.

Focusing on.

Again audio is about the same amount of engagement. The video has yet theres no one on a global scale. That's focused on audio we are we think thats a massive opportunity.

To go after.

And that's what we're focusing on so to the extent the video will play a complimentary role to audio and we'll probably pursued over time, but we really really focused on audio because that's the the big Big you know tailwind that we see happening over the next 20 years has gone from linear to on demand.

Next question from Rich Greenfield light shed.

When you say you receive long term agreement with Warner Music should we take that to me. These are not the typical to your deals and that this is now in place for at least five years.

Again can't comment on any specific terms ended deals, but typically is a multi years, they're not always two years some of them are three et cetera.

As well.

Next question comes from Hamilton favour at Atlantic Equities.

Apple music now has six month free trials in new markets, what's the risk that spot it needs to see another extension to free trial periods.

Again, well, obviously monitor that and see I think a key difference between us and competitive services, our freemium model, though so we've always had free and paid us the option.

And.

Well I've said this before but one of our key success elements as we typically bring people in on the free service.

They stay get engaged learn a user behaviors and then over time feel like Theres enormous value here, and then turn into paying customers that the the macro strategy that we're investing behind.

One should also note that many of the new markets that are competitors are launching in our emerging markets and they're obviously you're seeing.

Other impactors for growth like credit card penetration payment methods et cetera.

So you may see longer trying to peers being needed in those markets for those reasons, that's not to say that that will happen globally.

Our next question comes from Brian Russo at Credit Suisse.

You discuss how.

What you have seen so far this year gives you confidence in your full year EMEA UN subscriber outlook, particularly in light of the pandemic unrelated recession.

Maybe you want to start Paul and I can fill and yeah, I mean, I would say look for us we fully.

Acknowledge there's a tremendous amount more.

English there's a lot more uncertainty in the current market than there wasn't a pass that being said when we look at all of the metrics in terms of.

How we exited the quarter when we look at churn rates and we look at retention rates.

All those things have continued to trend into right direction.

We actually saw some acceleration towards the end of Q1 with respect to users.

People coming to our free product people, who it had lapse and it come back to Spotify.

So we feel good about the current trends that we acknowledge like everybody else, where an uncertain times, we're monitoring the situation as closely as anybody.

To see if we see any change in the data already the metrics.

But what we always try and do is give you guys guidance based on the actual forecast that we have internally and the current forecasts have internally.

Pretty consistent with where we started the year.

Next question comes from John expert at Stifel.

You're observing any changes in listening behavior. During this period, you think could persist beyond the covert 19 Lockdown has the mix of numerous catalog music consumption shifted at all recently are you seeing greater consumption of personalized algorithmically generated playlist than before.

I think it's hard to say what behaviors that will stick post the cover 19 locked down obviously, if I'd have to guess I would say.

As many people are discovering new devices to consume content on like Smarttv smart speakers.

Xbox Playstation.

As we mentioned those have been growing at more than 60%.

Just this quarter, so enormous change I would expect us as human learned that behaviors are going to listen.

And then us you're coming back to the car you would obviously listen to the car to say, we may see greater engagement than in the past, which would be great. If that was the case, but it's too early to say and then a new versus catalog music, we definitely see more consumption on on a catalog music and other types of content part of that.

Though has been due to the fact that we haven't seen the same amount of music releases.

This quarter, so I would suspect that that will shift as more new releases will come into play Q2 and onwards.

And then in terms of personalized that's just been the trend line overall as we are getting better and better personalization, we're serving better and better contents and more and more of our users are shooting that there's nothing specific to this quarter. It's just been an overall trend line there, we're seeing more and more people engaging with our recommendations.

Next question goes Maria reps at Canaccord.

Can you talk about the adoption of the two sided marketplace in the current environment did the pace change do you see adoption of sponsor recommendations accelerating as ours are competing for share of recorded music in absence of life events.

I'm not really seen a big change in trend line as I mentioned, if anything that's been fewer new releases overall.

But where early on in our marketplace strategy I'm. So we saw very very strong a release with the weekend, that's the sort of highlight of the quarter, but I feel pretty good about.

The marketplace team on what they're doing in the trend line for the coming years, while certainly when you think about just how much better the ROI as of the marketplace products compared to some of the tools that labels and artist have available to them today to market.

At leases.

And I would just out of the marketplace, but I wouldnt expect us to update the performance of the marketplace every quarter, but we did in this quarter reiterate that big the guidance. We gave at the start of the year has been reiterated for the marketplace.

We expect to we might get some questions based on the current environment and so we have reiterated the guidance we started with at the beginning of year for marketplace.

Next question some Emilio.

Given the crisis do you expect some premium users to change the Spotify add version in services like Apple music don't offer free advertising do you expect to capture new users, who unsubscribed from the paid service.

Well, so far we haven't seen any meaningful increase in churn, but we have seen an increase in lapsed users coming back to the service.

One could speculate and guests that those may have been with competing services, but in light of the economic crisis are now coming back due to our freemium offering.

But we don't have any concrete evidence that that's the case. So that's more me speculating on that but we're we're pretty encouraged as mentioned just increasing overall growth rate in over 130 million subs.

And we are reiterating guidance for Q2 and onwards.

I would answer a couple more questions.

Next question comes from Richard Kramer.

Hopes, let's move there is at what point do you need to look at the value of podcasts investments potential impairment given reduced AD spend outlook our premium subs.

Going to be impacted loss.

Let's see yourself going to be hearing ads in spot podcast.

So I'll start that one at this point, we don't see any reason, we obviously look at these things every quarter as I mentioned coming out of Q1, one of the strong areas of growth for advertising is podcasting.

And we see a lot of demand continuing on the podcasting add front. So we feel really good about that.

And yes currently premium users do do here ads in Spotify podcast.

Next question comes from Justin Patterson.

Given artists are increasingly reaching users on social channels Instagram you tube tick tock I was Spotify thinking of providing artist off platform marketing capabilities. It seems like the current iteration two sided marketplace is primarily marketing on Spotify.

Yeah, we're experimenting with various tools.

Based on what our customers are telling us I eat labels and artist teams.

And you may see off platform tools to that said obviously on platform is where we have our sales of of doing a really really highly.

Active advertising. So you can think of it but in a way where people are inline doing their actual listening that's probably one of the most effective methods that we can have in reaching users and connecting fans to view of new fab two new artists and that's a mean.

And we'll try and for us to invest in and that's unique to us and something that we think we'll both strength and user experience and artist experience on the platform to.

Okay, we've talked for both two or three more questions I'm. This one's from Ben Swinburn ex FX ARPU declines accelerated from Fourq to 19 was this decline greater than you had expected politicos out trials and campaigns, but presumably that was in your expectations. What does the outlook for ex FX ARPU for Twoq.

20, yeah. The ARPU decline was pretty much inline with expectations I'm. It might've been a touch worse, but in general pretty much in line I'm as we said the premium business was slightly ahead.

Yeah.

On the revenue side, so we feel pretty good about that in terms or the expectations, where and I would say F. The ex FX ARPU for Q2, Q2 thousand should be pretty much in line with with Q1 trends.

Our next question from Daniel Jones.

After the launch of direct artist payments are there long term plans to develop that channel as an ongoing revenue stream.

I think thats reserving to the artist pick tool that we released.

In light of the music relief fund next to the music at least fund announced but that we did too.

And what that it essentially thus it enables users to tip artists or for artists to two promotes costs is that our near and dear to them either them selves ER or.

Charitable organizations like music Harrison de less and other local organizations around the world.

Look it's too early to judge we were pretty much just reacting based on the new realities, but.

But we've been overwhelmed with the results so put it in perspective, just in the last few days, we've seen over 50000 artists.

Sign up to promote promote a call. So we're very encouraged with that and so the team is responding to that responding to the feedback were getting from artists can consumers alike.

Next question of some Heath Terry at Goldman Sachs can you elaborate on the line in the release.

Stemming from the core Rotce, you can point into two product mix.

I think we were identified talked about there's a couple of times, but I think this refers to the gross margin and this is about just our gross margin can be impacted by the mix of premium and ads.

And then the product mix within within premium so I think that was answered earlier.

And then we'll take one last question from Lloyd Wamsley.

How much of the two set of marketplace advertising revenue is true arm's length cash payments versus labels using credit is given to them as part of the broader content deals.

Are you seeing majority of the revenue on the cash side.

Yeah. This is a this is separate from that we don't really get into specifics as we said a lot of these end up being accounted for as a as a benefit to gross gross profit and not an actual boost to revenue.

But these are separate from from the credits.

And with that I will turn it back over to Daniel for some closing comments.

Thank you Paul I'm wondering closing, we're really pleased with our quarter and despite all the uncertainty in the world. We feel very good that we will continue to execute and respond quickly to the environment around US. We also believes that we will likely see new opportunities due to the economic environment and that spot if I will ultimately come out of this as an even store.

Longer company.

Thank you again for joining us today.

Great. Thanks, everybody. That's what we said the replay will be on the the website shortly.

And please give us any feedback on if you preferred slide or we think it went pretty pretty well, but if youve any feedback we definitely appreciate it. So thanks again, everyone and stay safe.

This concludes today's conference call you may now disconnect.

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