Q4 2021 Spotify Technology SA Earnings Call

Podcasts, Inc. In general music overall in podcast as well as a percent.

We're seeing engagement increasing.

Across our platform, particularly in podcast thing, we're seeing consumption, increasing so all of that is leading to more inventory which is great.

Seeing more publishers in span of double digits quarter over quarter, So that's allowing us to see more inventory and then what we've also seen is that with with span we're able.

To monetize really well and because we're monetizing giving people. Good returns they are opting more inventory into the platform for us to sell and then when we have more inventory to sell on the platform you get even more advertisers who want to spend and be a part of that so we're seeing this nice flywheel effect, where the performance of span is growing really well people are then adding in more.

Inventory into the ecosystem and then more advertisers want to be part of an even bigger a bigger platform. So that's worked really well, obviously openings span up into anchor will be a really strong as well.

Potential to be strong for next year as well as a number of other initiatives yeah and the only thing I'd add is I think it's really the combination here, it's really both about expanding audience, but also expanding the number of creators to the more creators we have the more inventory we have to place against it and then obviously the more users will come.

That's a function of the more creators we have as well. So that's another sort of key components of this and you alluded to some of that in your question with audiobooks et cetera.

We have any update on the hi Fi tier what's been the delay and does your guidance contemplate any price increases in 2022, alright. So I'll start with the question and then Paul can speak to the guidance. So yes, I mean, many of the features that we.

Talk about and especially that's related to music ends up into licensing and so I can't really announce any specific on this other than to say that we're in constant dialogue with our partners to bring this to market.

Yes, and then with respect to price increases.

We haven't commented on anything at this point in time I'd go back to early in a year. When we did make some price increases we feel really good about that.

The churn characteristics, there wasn't anything material as well as gross intake where there wasn't any material changes. So we feel good about the ones we have.

Already put in place but no.

No comments or updates on any additional price increases moving forward.

Alright. Our next question is going to come from Deepak on premium subs can you give us some color on your premium sub guidance of $183 million is there any impact from changes in promotions or incremental churn that's weighing on sub growth for the first quarter.

Yes, so I addressed this a little bit earlier, but let me just kind of give a little bit more color.

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It's really a lot about the promotional cadence and the seasonality throughout the year. So as I said, if you go back a couple of years. Historically, we had always done promotional campaigns in Q2, and Q3 and there is always some seasonality between Q1 and Q3 relative to Q2 and Q4.

Last year, we actually tested in additional campaign in Q3.

And so instead of having two campaigns, we had three campaigns and those campaigns were actually a little bit shorter in length in each period.

And so that impacted the seasonality in 2021 and that will likely impact the seasonality in 2022.

In addition, when you look at Q4 in General just continues to become a bigger and bigger quarter for us and so you saw both the success of the seasonal campaign in Q4 number one and then the success of wrapped also which drives a lot of incremental traffic to Spotify and so when you look at Q1 in general It continues to become just a smaller part of our overall subs picture every year.

Part of it's just the the hangover.

Hangover of the follow through from how strong Q4 tends to be and it's also a part of how we've now adjusted our promotional cadence throughout the rest of the year.

And with respect to churn, while we don't give out.

Guidance.

Churn has continued to come down it's down year on year and when you look at our core churn of our monthly subscribers, we feel really good about the trajectory of that churn has been on.

Okay next question from Andrew <unk> on gross margin.

How much do content investments play into the first quarter gross margin guidance is there anything notable driving the year on year decline.

Yes, there's a few things.

In Q1 as I mentioned, there was an initiative we were going to test in Q4 that test got pushed to Q1. So there is some incremental there there's a few other things.

The first year of lyrics and which will have a little bit of an impact and the rest is investments.

As you've seen on the content side, we've had a lot of success, particularly in U S and so some of the content will continue to go to U S growth, but then as well as expanding a lot of our strategies and innovation.

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International markets and newer regions on the content spend and then I'd say lastly is.

We are still operating under the current CRB rates and so that will be up in.

And impact a little bit in the U S as well on the publishing side and as I said in general we feel really good about gross margins and how it has progressed over the last two years it was up in.

In 'twenty and again in 'twenty, one and when you look at sort of the core fundamentals of gross margins and the things that were doing a year on year, we're seeing a lot of leverage, particularly on core OLED podcast thing as well as benefits or marketplace and advertising and so.

Gross margin 2022, it's really that that confidence in what we've already done which is giving us or giving us confidence to continue to invest in 2022 .

Alright next question from Justin Patterson on the billion user opportunity Daniel last year at the <unk> event you previous previously spoke to a 1 billion user opportunity over the coming years, what are the key investments to get there.

As it implies a significant step up from the current Mou base.

Yeah.

Alluded to some of this in my opening remarks, but we think a very very key.

And that is going from the $11 million total craters that exist in Spotify today to 50 million active creators on Spotify in the coming years, but that amount of content, you're going to see a lot more engagement with the tools that we're building both for creators and consumers alike youre going to see.

Consumers and creators expand.

Their engagement in totally new ways.

We think define what this next generation of audio will look like but.

A little bit of a push.

First I would want to end by saying that you're going to hear us talk a lot more about this during our investor day, So I really hope to welcome all of you there to learn more about what our plans are for the coming years in that area.

Okay next question from Ben Swinburne couple of questions in here.

Does the first quarter premium guide reflect elevated churn from the recent Joe Rogan controversy and or are there any additional steps you plan to take to contain potential fallout and then separately can you put the audio books opportunity in context for us.

Sorry.

Yeah. So.

For the first time, I think actually answer the guidance question, but I'll start there yeah.

No. So the easy answer is we don't reflect any churn from the recent Gerry thing in general.

What I would say, it's too early to know what the impact may be and usually when we have had controversies in the past those are measured in months and not days.

But I feel good about where we are in relation to that and obviously top line trends looks very healthy still.

So.

And in terms of the steps that we've done as I have outlined we've taken pretty dramatic steps on Sunday in my blog posts three things one is publishing our our policies and making them clear to the world just an acknowledgement from my side Thats, probably late we should've done it earlier and that's on me but.

The second thing is very very big and no. Other audio platform has done this and thats providing this.

Content Advisory notice next to COVID-19 content. So all COVID-19 episodes will be tagged with this that then will link to accompany messaging by scientists decisions and public organizations like the CDC in W. H O et cetera, you're going to notice this and this is being rolled out right now.

As we're speaking so this will be very prevail in that very visible.

At the very top of every episode that speaks about COVID-19, So I feel really good about what we're doing there and it's really unprecedented compared to any other audio service what youll see us do in the coming days.

So the last thing then is can you put the audiobooks opportunity in context for us.

So I think that Theres two modalities of audios somewhat simplified we have the podcasting, which is what we've mostly been speaking about in the past call. But then Theres also paid audio and paid audio today is mostly the audio books business.

So what's exciting for me is obviously, enabling all forms of audio on this platform.

Platform and longer term when I when when we look at this platform as I mentioned I don't think it's just one size fits all it's really about enabling a multitude of different audio creators and we want to be the best place for all audio creators.

And having the multitude of tools that enables them to monetize that content.

And the best way that.

They see that fit so that may be through subscription, but it may be also through Ala Carte and it may also be advertising. So I think it's a audiobooks in our view is a subset of the overall audio opportunity, but obviously it touches the very important creator group, which is authors so.

We're very excited about that opportunity and long term I think you can look at markets like China for instance to look at just the innovation that's happening in audio books there.

For me, it's strange to imagine why not more of that type of innovation have come too many of the western markets as well.

And it's really in that vein that you should think about the Spotify platform, there's going to be a lot more openness and theres going to be a lot more flexibility in how we treat content and creators on our platform.

Great next question going to come from Eric Sheridan.

Coming off the content investments of the last few years can you update us on management's longer term thoughts around gross margin trajectory in the mix of headwinds or <unk> in the coming years.

Yes so.

To start I'd say at a high level nothing has changed at all in terms of the long term guidance. We've already outlined in terms of where we think we can go over the long term that 30% to 40%, which we've already talked about and as Daniel mentioned, hopefully we'll have some time to unpack that more at the Investor day in Q2.

So thats number one when you think about the headwinds and tailwind I think what I would say is we actually feel like we're getting nice leverage on a number of the initiatives. We already have so when you look at some.

Some of the content, we've had on again for more than a year and you see.

Revenue per listening hour, increasing at a faster rate than cost per listening hour, we see that leverage starting to show up and so the reason we're investing more is were doing it incrementally and in more regions and in more areas because we've seen the benefits of the leverage on the products that we've had for a period of time right now.

I would say the headwinds a lot of them are I would say self inflicted meaning we are investing against what we think is an even bigger opportunity.

And so we could probably be more in harvest mode, right now and show near.

Near term more incremental margin expansion, but given what we're seeing in sort of the core business. We feel like the investments are really going to pay off to drive even bigger long term gross margins in the future. So that's how we think about it. The one thing I would just add to that is when you look at it when we signaled for 2020 in 2021 was actually that gross margins were.

Go down with the levels of content investments that we were making but if you look at what actually happened.

We're really ahead of that plan. So a lot of these things are proving out in a very very strong way in our business and Paul alluded to some of those thats marketplace. It's obviously advertising and some of those other investments that we've been making in the <unk> content to which improves that gross margins. So we feel very emboldened by that and that's all.

Honestly the light that you should look at our investments.

Alright next question from Mike Morris on marketplace.

How is two sided marketplace driven benefit for both you and your label partners. During the current contract period has it been a win win and do you expect terms to expand going forward and how can this impact your gross margin progression.

Yeah.

So with this so I think the first thing that I would say is it has very little to do with our current contract period like I alluded to in my prior conversation. It's more in addition to whatever the contract.

Dictates. So the way you should think about this is that we have a platform and we have a set of licensing agreements that dictates a lot of the content that we have on that platform.