Q2 2022 Spotify Technology SA Earnings Call

As a reminder, this was one of the weak spots for us in Q2 of 2021, so I'm really glad to see the hard work from our teams has paid off.

In addition, our global subscriber growth exceeded expectations by 1 million while revenue was in line.

Going forward, while the macro environment continues to present uncertainty. We're currently not seeing any material impact on our expectations for users or subs growth from the economic downturn. In fact, we're seeing several markets trending ahead of our forecast that said in anticipation of a potential slowdown.

We already shared that were weekly revenue monitoring.

I've said this before I do believe only the paranoid survive and we're preparing as if things could get worse, but it's hard to be anything but optimistic my confidence in our business and the unique Spotify machine that we're building is really unwavering audio is growing and Spotify with it hopefully after last month's investor day.

This is a term you're all familiar with and for those needing a refresher we believe the Spotify machine is what differentiates us from other tech platforms.

Leverages one consumer experience powered by three revenue generating business models subscriptions ads in marketplace and as I detailed last month, we're confident in our ambitions to get to 1 billion users by 2030, while at the same time. We are also focused on improving our gross margins and continuing to generate positive free cash flow.

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And this <unk> repeat approach and the machine behind it that bundles multiple business models with multiple verticals into one user experience is what we will continue to invest in.

Not only will this investment benefit Spotify and its shareholder but it also creates tremendous upside for listeners I'd really encourage you to go to our investor site to catch a replay of our recent events. We highlight the big bets, we're making incredible opportunity on the horizon and detail, how we're mesh and we'll open it up to the Q&A.

Great. Thanks, Daniel and thanks, everyone for joining us.

As Daniel mentioned, we've moved away from our shareholder letter transitioning to a slide based presentation. Our goal is to make our performance is easy to understand as possible and we hope this new format resonates with the investment community. Please reach out to me or the IR team with any feedback.

Now turning to the corner I'd like to add a bit more color on our strong operating performance and what we're seeing with respect to the macro environment and touch upon our outlook.

Let's first start with our strong user performance total monthly active users grew to $433 million. In Q2. This result was $5 million ahead of our guidance and was the largest Q2 net additions in our history. After adjusting for our exit from Russia, and the March outage, which we discussed prior.

Moving to premium we finished the quarter with 188 million subscribers 1 million ahead of guidance. Thanks in part to broad based strength across regions, particularly in Europe , and Latin America were up.

Revenue finished ahead of guidance, which was helped by currency movements and we saw another strong quarter in advertising, which grew 31% year on year.

With respect to gross margin on a reported basis Q2 finished below guidance, but gross margin was modestly ahead of our expectations when adjusting for onetime charge related to our decision to stop manufacturing car thing as well as the positive net royalty impact we saw from prior period accrual adjustments.

So looking specifically at car thing our decision to stop manufacturing device. The device was made based on a few factors.

Rising inflation and component costs, coupled with the expanded lead time needed to order parts has significantly altered the risk reward is continuing to lean into further product development.

Our decision resulted in a onetime charge of $31 million impacting gross margin gross margin by 109 basis points in this quarter our.

Our decision will minimize further gross margin impact and cash flow expenditures moving forward.

As we discussed during our recent Investor day much of our operating expense growth. We saw in Q2 was the result of decisions. We made through the end of 2021, mainly to expand our global sales team invest in our platform and increased marketing to drive user growth. We have also added incremental costs associated with our acquisitions of parts sites charitable and Bouska.

And lastly, while we did forecast higher growth a significant portion of our operating expenses are in U S. Dollar denominated in foreign exchange Foreign exchange movements added nearly 1000 basis points of growth in expenses and this was more than expected in.

Despite the increase in operating expense, we generated our ninth straight quarter of positive free cash flow and we're looking at our free cash flow growth on its while trailing 12 month basis, which smooth out seasonality. It shows a very consistent trends, we've averaged over $200 million of free cash flow for the past three years. We believe this is really key way of looking at our business.

And also smooth out the lumpiness that we see quarter to quarter.

So looking at Q3 and beyond as Daniel said, we continue to monitor the global macro outlook, but to date have seen no real impact on our user or subscriber outlook, specifically, we expect to see another quarter of accelerating Mou net ads and expect subscriber net additions similar to Q3 of last year on.

On the premium side, which is still the majority of our revenue we expect <unk> to be up in the mid single digits and.

And for advertising, we did see some softening in trends over the last two weeks of June .

But with that as context as context, we still expect solid growth in Q3, albeit.

Specifically, we expect to see another quarter of accelerating <unk> net adds and expect subscriber net additions similar to Q3 of last year.

On the premium side, which is still the majority of our revenue we expect <unk> to be up in the mid single digits.

And for advertising, we did see some softening in trends over the last two weeks of June .

But with that as contact as context, we still expect solid growth in Q3, albeit slower than we might have forecast earlier in the year.

So our expectation for continued core operating improvements across our music and podcasting business offset by select growth initiatives.

Our expectation for continued core operating improvements across our music and podcasting business offset by select growth initiatives.

We anticipate elevated operating expense growth consistent with Q2s run rate for the next few quarters.

With the benefits of our previously announced 25% slowdown in new head count additions showing up later in the year.

Currency will continue to be a negative drag on opex as well.

In closing despite an uncertain macroeconomic environment, we continue to be highly encouraged by the trends we have seen year to date and with that I'll hand things back over to Brian for Q&A.

Alright, Thanks, Paul and again, if you've got any questions. Please go to slide O Dot Com hashtag Spotify earnings Q2, 'twenty two once your questions entered you can edit or withdrawal it by selecting the option in the bottom right. We will be reading the questions in the order they appear in the queue with respect to how people vote up their preference for questions and our first question today is going to.

Come from.

Matt Thornton on the premium subscribers can you provide some color.

On what Youre seeing in terms of gross intake and churn.

And what impact of the extra week of promotion had on second quarter and the <unk> outlook.

Yes, so in general really positive trends that we saw no. We haven't seen any change at all in the trajectory of gross intake or churn.

Don't give out specific share numbers, but I can tell you churn was in line with expectations and down on a year over year basis, and so no impact on either of those.

And the extra week, it definitely helped a little bit in the quarter I would say some of the outperformance came from the extra week, but not all of it.

But we see that carrying through.

Into Q3 and so the.

Q3 number the expected growth in Q3.

Is the same that we thought heading into Q3 as it is heading as already heading into Q2 as it is heading into Q3 so.

The outperformance was.

We're strong in Q2, and we also see strong growth in Q3 as well.

Alright, we've got another question here in the queue from Matt Thornton This one's on our live initiatives, what's been the early uptake and reaction from artists or content creators.

Are we driving awareness and what's been the early willingness of artists and fans to want to sell and buy live experiences via Spotify.

Yes, I would just really kind of say it's early days on experimentation on our lives initiatives, both the sort of physical and digital once we have been experimenting quite a bit during the pandemic. Obviously, it's been hard to do that with physical live events, but we did a bunch of them on the digital side.

I think the reality is much of those learnings are inconclusive because much of the world.

That we're in now and then sort of post pandemic World. If you can call it that.

Is it just very different from the experiences that people were willing to pay for an experienced during the pandemic.

So we're in the early days of learning and Iterating what gives me.

Optimism is really kind of looking at how prevail in this format is in many Asian markets. However, so there you see a great.

<unk> of everything from live shopping too.

Formats, where you see <unk> you see consumers.

Wanting to participate in the live stream with their favorite creators. So theres a lot of innovation, that's going on in Asian markets. In this space, that's where we're looking at for inspiration, but it's not something that you should expect to be a rapid improvement in the near quarters, but this is a multi year effort from us.

Okay next question from rich Greenfield on new verticals at your Investor Day, you talked about new categories, having closed on your audio books acquisition, how should we think about the impact of this new category in the back half of 'twenty, two and when should we expect to hear more about the other categories you teased at the Investor.

Hey.

Yeah. So we're very pleased.

Closing find a way.

Yes.

Yes.