Q1 2022 Spotify Technology SA Earnings Call
I'm looking for memories, but most of all.
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[laughter] what party would be best for women I don't the Greens more popular.
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Everybody's got questions about politics, and it can be hard to know where to turn to find the right answer I seriously did not know how voting walked until I was about 24, and that's a really common experience because politics is confusing and you know what often it's much better for politicians, if we dark partially understand what is going on he can also just fell through.
Thing two may eat ordinary things, especially when politics is so dominated by people who don't necessarily look like yeah. So often it can feel like you'll just jumping into the conversation to like like you're at a party and you've joined the group chart, but you can't quite keep up with what was happening. So you just kind of like not a long ago, Yeah, I love doing that.
Dogs, because it turns out that conversation to the party is actually really important for the way that our daily lives run and for the way our country is wrong and that's why we decided to make lyft ride out a weekly podcast with two young women onto your question about Australian policy and a brown woman Nonetheless, I like that.
[laughter] I'm L. P. Scott I'm, a journalist and rise up and I'm just mainland of timely I'm also a general or to report on news and politics and every week, we're gonna be answering one of your questions that has anything to do with Australian politics, because politics is for everybody Tomorrow, Christy is really important and no one should feel left.
Out of these conversations listen to left right out free are only on Spotify.
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Good morning, My name is Julian and I will be your conference operator today.
At this time I would like to welcome everyone to Spotify as Q1 2022 earnings conference call and webcast.
Ian Goldberg head of Investor Relations you May begin your conference.
Thanks, operator, and welcome to Spotify as first quarter 2022 earnings conference call joining us today will be Daniel <unk>, our CEO and Paul Vogel, our CFO will start with opening comments from Daniel and Paul and afterwards, we'll be happy to answer your questions questions can be submitted by going to slide O Dot Com S. L. I D O dot com and using the code hashtag Spotify earnings Q1.
22.
Analysts can ask questions directly into slide Oh, and all participants can then vote on the questions. They find the most relevant we ask that you try to limit yourself to one or two questions and to the extent you've got follow ups, we'll be happy to address them time permitting if for some reason you don't have access to slide <unk>, you can email investor relations at IR at Spotify Dot Com and we will add on your question before we begin let me quickly cover the safe Harbor.
During this call, we'll be making certain forward looking statements, including projections or 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 today's call in our letter to shareholders and in filings with the Securities and Exchange Commission. During this call. We'll also refer to certain non <unk>.
<unk> financial measures reconciliations between our <unk> financial measures can be found in our letter to shareholders and the financial section of our Investor Relations website and also furnished today on form 6K, and with that I will turn it over to Daniel.
Alright, hi, everyone and thank you so much for joining us.
So I'll kick off by sharing a few of the highlights you may have seen in our shareholder letter we delivered another strong quarter in Q1, and when you exclude the impact of our withdrawal from Russia. We came in line or ahead on every metric.
And this performance builds on the momentum we saw in Q3 and Q4 of 2021 and I'm very pleased with the continued acceleration we're seeing in user growth headed into Q2.
There are puts and calls in every quarter and this one was no exception as I've said several times before Q1 traditionally sees lower new user activations, but despite this we delivered solid results and I think this is a testament of our consistency of execution and clearly shows just how compelling our offering.
For creators users and advertisers even in the face of uncertain deep provoked by world events.
So it's safe to say that my overall confidence in the business continues to grow on all fronts case in point is the strength of our music business evidenced by the recent release of new royalty data on our loud and clear website. The data clearly outlines the role Spotify and streaming are playing and growing the entire music ecosystem.
Not only is streaming driving record revenues in the music industry, but there are more artist sharing in that success than ever before in fact, the worldwide growth is truly staggering as more artist hits milestones across all revenue levels. So for the first time over a thousand artists.
Generally that over $1 million and over 50000 artists generated more than $10000 on Spotify alone for those who are interested in learning more I would encourage you to check out the loud and clear website.
So our core business remains incredibly strong and this strength is built on the investments we continue to make in constantly enhancing our platform, which in turn elevates the experience for users and creators, we're especially investing in our core platform capabilities. These are multi year investments.
To enable a constant iteration across our products tools and services and given the positive results. We're seeing you should expect this to continue for the foreseeable future.
I recognize that many of you want more clarity around when the benefits of all of these investments will be realized including when they will show up in our financial statements and this is something we will unpack for you at our upcoming Investor day.
But to give you a sense of the breadth and the impact of our investments are already having for creators to users and advertisers allow me to offer a few examples of things we shipped this quarter.
We'll take our ads business, which continues to be a strong revenue driver. Thanks to the investments, we're making to modernize audio advertising. So recent third party survey validate this belief showing that Spotify is the must buy audio AD partner in the U S and we're delivering more impact for advertisers and publishers through our acquisitions like.
Todd sites in <unk>, and we are already seeing the impact of these moves are hiring on renewal rates and deal sizes and these moves will bring important innovation to the marketplace and accelerate our ability to unlock significant revenue growth in both music and podcasts.
At Spotify were constantly testing and experimenting and in Q1 alone we.
Ran almost 2000 experiments, which is a 5% increase over the previous quarter. Some of those experiments led to full global product launches like the new updates and campaigns were rolled out for blood, which drove 17 times more use at user registration than even our annual wrapped campaign.
And in the first 20 days of the blend campaign, we had 22 million users create blend playlists.
Part of the growth as well, so it's kind of head count it.
Sales and marketing because we have $3 5 billion of cash on the balance sheet, where our free cash flow positive business will be free cash flow positive again this year and we look at this as just a great opportunity to continue to double down on all the things that are working for us and so we've talked about this in the past, but we see the core business that's been around for a while having steady consistent growth with improving trends.
And we're going to continue to invest against the business that we think is setting us up for not just the next couple of quarters, but over the next five to 10 years and Thats, what youre seeing in some of those numbers.
Okay. Next question is going to come from Steven Chahal on gross margins within the AD supported gross margin of negative one 5% can you give color on music margins versus podcast margins and it seems like podcast engagement is still growth plans.
Yes, so Q1.
We tend to have margins around this level.
This is a reminder, all of the costs all of the content cost for podcasts and goes into our AD supported business in Q1, while.
It was one of our strongest Q1 ever from our advertising as a percentage of revenue. It still is a relatively small quarter from an advertising. So when you put all of the costs in this stuff, we're adding into Q1.
Ever from our advertising as a percentage of revenue. It still is a relatively small quarter from an advertising. So when you put all of the costs in this stuff, we're adding into Q1.
Into 2022, and the Q1 on a lower ads base, that's what impacts the adds margin.
The music margin as I said overall has been kind of trending higher so that's great.
And so that's the impact on AD supported gross margin it was actually slightly better than we thought.
Content spending was a touch lighter than we expected in Q1, but overall pretty much in line with where we thought and how Q1 tends to be for the mix between advertising and content spend and then I'm not sure.
Why you think podcasts engagement is growing more slowly that it's actually not something we've said podcast growth has actually been really strong for us.
Podcasts.
<unk> hit an all time high it was actually up pretty nice.
Sequentially.
We are seeing.
The minutes of use in terms of podcasts engagement hitting all time highs as well on the platform. So the podcast numbers are actually really good on the platform Yeah and the only addition, I would like to make is that when we look at even some of the more mature markets for us.
And and the music growth and now the growth with podcasting and we look at comparisons like radio I E.
Our audio consumption patterns, we still see the sort of ceiling being probably.
Two to three times.
From where we are today in hours.
So plenty of growth left ahead and this is in some of our more mature markets. So obviously massive growth opportunities.
Our three or four times the size of even Super Bowl. So this is a massive opportunity, where we're front and center with them and where it's not just about the brand Spotify, but it's about all of our creators and all of our consumers coming to light we like a lot of things about this partnership.
I would just add Dan I'll touch on some of those things, but unique viewers per year. So that's just an incredible number they have gains multiple games year that attract an audience. That's four to five times the size of the Super Bowl.
<unk> of their audience is an emerging or developing markets and where we are growing and you expect to grow the fastest in such a great audience to have even just from a cultural standpoint, I mean, they had at their stadium the largest ever attendance for women's soccer game in history, and so theyre driving cultural change there to which we want to be a part of so we think that's great in general and so we're really really proud.
To be partnering.
Okay next question from Justin Patterson on marketplace in Podcasting, Daniel how would you gauge the progress you've made in the two sided marketplace and podcasts today versus where you'd like it to be.
And what do you see as the next steps to attract creators and help them build and monetize their audience.
I feel really good about both the progress on the marketplace. However, our obviously have loved things ship, even faster than <unk>.
For us to push even harder.
And that's my job I keep coming into the office every day pushing the teams to think bigger work harder and ship more things that delight more of our consumers and creators around the world, but I feel good about where we are we will take some of the time it during investor day to unpack more concrete lead some of the benefits we have.
Had in marketplace because.
It's looking really good and on podcasting, obviously, we've already spoken quite a bit about it during this.
Earnings call, but you should expect us to really on a foundational battery.
Our concrete lead some of the benefits we've had in marketplace because.
It's looking really good and on podcasting, obviously, we've already spoken quite a bit about it during this.
Earnings call, but you should expect us to really on a foundational better and that are growing the number of consumers grow the number of creators increase the opportunities for creators to grow their listener base engaged with their listener base and monetize that base and we're early on in.
In particular tools that allows creators to grow their audience and engage their audience and monetize their audience in new ways. So if anything I would not say, even if even if I'm pleased with the impact its having its early days in terms of that and that I think will transform the entire perception of Spotify in the markets.
<unk>, both from creators and consumers alike.
Next question from Rich Greenfield on the Google deal.
It's after downloading Spotify from the Google play store you are presented with the choice to pay either with Spotify is payment system or with Google play billing why wouldn't Android user with all their billing info stored with Google to Spotify and cannot be cheaper.
Well, maybe I'll start and then Paul can chime in more we feel really really good about this partnership with Google for many investors you may know that this is something we've been talking about for years.
And we think this is a very important step in the right direction for the entire.
Sort of App <unk>.
Development ecosystem as well and just to kind of again reiterate what it is we've been asking for all these years, it's very simple its about a level playing field and that level playing field has three core tenants, we want to be able to communicate with our consumers.
The way they want to us to communicate and us as the developer to be able to do that too we want to be able to monetize that relationship the way it makes sense for that consumer and for us and three.
We want to get access to the same tools and services E. Apis that this platform offers its own services. So that's the kind of key tenants and we feel really good about our Google because it kind of takes the box on all three of those.
For us and we think this is kind of a landmark deal that sets a new precedent for what our platform should be able to do and then coming back to that considered a consumer behavior point in fact, theres a lot of consumers that today are shooting to do direct billing with Spotify today, because it's an easier service experience and <unk>.
Because there are different cost structures associated with some of the payment alternatives. So you can imagine being in a market, where there may be a certain price offering by going direct with Spotify and where there is a different price mechanic. If you go with.
The Google play billing because it has carrier payments and this is all we're asking for really its choice and again, we feel really good even if.
That consumer decides to choose to Google play and billing service as well.
We're only asking for choice and we feel great about what this deal does for us yes.
And the only small thing I'd add is we obviously can't talk about the financials of the deal, but I would say from our perspective.
I think in part of your question is we're pretty indifferent if a consumer decides to use Google play building or Spotify building.
Okay next question from Matt Thornton another one on marketplace can you talk about marketplace progress, including with merch and live events and where your focus through 2022 and is there an opportunity for power users and Spotify is the marketplace to monetize.
They create.
Yeah.
So feel really good about our marketplace progress as I mentioned before and.
And we are doing a lot of experiments over 2000 in the quarter or like some of these are live events digital and physical ones, where we're helping enable those.
And of course merch.
<unk> we're experimenting.
A lot of different things to provide more value for creators and consumers alike, and we will unpack more of the details about the marketplace and where we are but just going back to one of my previous answers.
I definitely believe we're in the early innings of our platform evolution and yes of course.
Something that we've been on for a while.
I think youre starting to see a lot of the benefits because of our core platform investments, but truthfully. When you look at this sort of consumer and creator journey.
It's still.
Yeah.
Traders and their partners are leaning into and so we see marketplace have a nice impact on the overall margin structure of sort of that business that we that sort of core business that we operated back in 2018 and yes. Most of the the reason the margins in general Havent expanded from a consolidated basis is all of the incremental investments on top of it.
Next question mix product mix can you provide a little more color on those components and how should we think about price and mix for the rest of 2022 and did price increases drive any uptick in churn.
Yes, just churned earlier, so let me just talk about their pricing.
Q1 was probably the last quarter, where we were where we got the benefit of some of the price increases we had last year and so we will kind of anniversary that so I wouldn't expect the same level of <unk> growth in the next three quarters that we saw in Q1 as far up as it was in Q1.
Another question from Doug Anna.
When you think about the next wave of Mou and subscriber growth for the company what markets standout most to you.
Well, it's really based on.
They are different ones in different time horizons, so the big <unk> opportunities for certain in the near future.
In Southeast Asia.
And we've spoken about India, and Indonesia, and some of those markets, where we're doing incredibly well, but obviously you can look at that that Tam.
In that region Europe , India alone is over $1 billion. So it is just massive massive opportunities from an M&A perspective from a subscription point of view I think you should be.
Ian.
It is just massive massive opportunities from an M&A perspective from a subscription point of view I think you should expect the core markets to keep growing for a while longer even though we're adding more and more subscribers and some of the emerging markets as well, but but revenue growth is definitely more of the sort of core markets.
Phil empowering the train for a while longer and then eventually some of the emerging markets will pick up that pace of growth.
Next question from Ben Swinburne on podcasts, how would you assess your progress on podcasting at this point how quickly as usage growing on our platform, our CPM and margins holding up and span and do you have a line of sight into profitability overall in podcasting.
Yes, let me try and unpack all of that.
So the.
The progress is going great. The usage is growing great. So as I think I mentioned earlier when you look at our podcast to total Mou It was up pretty significantly year on year. It was also up nicely sequentially quarter over quarter. When we look at podcast listening hours year over year also up really significantly.
So really strong growth in listening hours and usage and the number of users who are engaging in podcast thing so.
All of that has been great CPM has held up really well.
Spans going great one of the things we've seen in spend and I think I've mentioned this a couple of times in previous quarters is <unk>.
Span is performing really well there is a ton of demand for podcast advertising and what we're seeing is.
The publishers continue to opt in more inventory into span as theyre seeing the results and then as we have more inventory inventory is actually attracting even more advertisers because there's more of an audience. They can reach and theres more inventory for them to spend again. So we saw that dynamic continue to play out on the spend side.
And in terms of line of sight in terms of profitability overall in podcasting I do we will try and unpack a little bit more of that in the Investor day.
But as I said I think it's not it's not super far off they will it will still be negative in in this year and we as I said earlier I think to Richard's question.
The overall kind of long term margins on podcast thing, we still we still think will be really favorable to the overall Spotify.
Okay next question from Justin Patterson on the ads business.
Paul AD supported revenue was lower than most envisioned how should we think about the puts and takes around the macro environment M&A and comps in your forecast and have you seen any changes in advertiser behavior.
Yes, I mean advertising in general was strong it was up over 30% for us in the quarter as I think I said in my opening comments, we were trending kind of more towards that 35% to 36%.
Before Russias invasion of Ukrainians like a lot of people we did see.
A couple of weeks there were.
Some advertisers pause a little bit and there was some uncertainty on how much they wanted to advertise so we did see that in the last month of the quarter.
We see kind of similar levels of advertising growth that we saw in Q1 into Q2.
Theres, probably I think others have probably said this was probably a little bit less visibility than we've had in the past, but overall the team is still super optimistic on <unk>.
Advertising and kind of advertisers desire to spend on Spotify on our CPM is in our inventory and span and all of those and so we still have a pretty optimistic forecast for advertising growth in for all of 2022 like I said it was really strong in Q1 definitely saw a little of an impact as a result of the war in the back half of the.
Of the quarter, and we see pretty good growth in Q2 as well.
Okay question for Mario Lu on podcast and can you provide an update on how paid podcast subscriptions are performing on the platform in terms of creator adoption and user engagement and can you confirm a 5% take rate is still expected to take effect starting in 2023.
Yeah. So overall.
Early days in terms of podcast subscription.
But the ones we have on the platform are additive in terms of user engagement and we look at that as a very positive thing. So we're bringing lots of.
Content onto the platform that otherwise, we wouldn't have been available to us and.
Again users are loving that theyre able to consume that content onto the Spotify service and yes, we still plan on charging 5% take rates in 2023.
When that introductory offer passes.
Okay, We've got time for one or two more questions.
I was going to come from Benjamin Black could you help us understand the economics of your new agreement with Google.
User choice billing how does this impact your outlook for subscriber growth and does it unlocked new business models like buying audiobooks podcasts et cetera.
Yes so.
I'll kind of Echo a few things already said, maybe add a little bit. We are one is obviously, we're not going to talk about the financials of the deal, but as I did said I think we're pretty indifferent to whether or not a user wants to use Google play building or Spotify in terms of how they pay.
In terms of outlook for subscriber growth, it's hard to really know I would say to daniel's earlier points anything that eliminates friction in the process is great for us and so we've talked about more fairness more openness more choice.
Excuse me, we think all of that is great for.
For users first for subscribers and so that it's only going be goodness for us how much we'll have to see but theres only goodness in that.
Unlucky business models, I mean, it potentially could I think in lots of markets. This is how people are going to want to pay this is how they're going to access it. So I definitely think it could it could.
Unlock incremental potential for us by having this as an offering.
Alright, we're going to take one more question.
From Jed Kelly.
Can you talk about how youre thinking about utilizing the live shows to increase engagement and when you think about doing more live content around sports talk and sporting events.
Yes, we are definitely experimented cryo and live shows both paid live content.
Sort of music live content.
And allowing more and more creators to post their own live rooms, and having engagement with fans. So the early days of this this quarter we engaged.
And.
It really took the Spotify greenroom rebranded it to Spotify lie that made it a core part of the listening experience on the service I think you should expect us to keep integrating that service.
Into the main Spotify experience and allow for creators to do more and cooler things and I think you're entirely right. It's hard to say, how big live as a form S versus time shifted my expectation would probably be the time shifted is by far the biggest thing and if you think about the internet that's kind of the big.
<unk> that we enabled as time shifted content versus having to listen to things light, but that said there are certain content formats, you mentioned sports and sporting events being the prime examples of where live and being closer to real time makes sense and.
And Theres, probably a few other locations, where where consumers care about that too.
In our experience and from what we're seeing those sort of must see must have things can be huge from user growth perspectives, but in total hours of listening we.
We expect time shifted content to be far bigger.
Alright, Thanks, Jed that concludes our question and answer session I guess I will hand, it back over to Daniel for some closing remarks.
Yeah.
Thank you for joining the call everyone and I look forward to sharing more at our upcoming Investor day that we've talked about.