Q3 2022 Spotify Technology SA Earnings Call
Sure.
Yes.
Exactly.
This is a literal neo Nazi group, it's what's the premises is pushing for a race war to bring on the end of democracy.
I'm, Ben Mcafee, when I cover extremism and National Security for Vice news and the story of American extremism is already deep into the fabric of this country.
<unk> is one of the things, which is causing that breakdown of American society alienation of the people generalists.
And it continues into the present fueled.
Fueled by two decades of war.
I think we got a lot of angry people, who came back from those wars, while we were focusing on al Qaeda and then Isis and federal government was completely ignoring this growing life's premises movement at home.
I'm going to show you how these far right ideas that one seems to fringe widespread morrisey thats. The process. This is a hoax of conspiracy theory used to divide the country and keep a hold on power are now searching into the mainstream so just because January was not a mass casualty event should not confuse us.
And just thinking that the next thing won't be a mass casualty event because this is the real forever.
I mean, I think they silver by alongside.
So I mean, it's never going to be over.
Yes.
For Vice news and Spotify and Denmark.
This is American Ter.
American Terrors out now.
And listen for free only on Spotify.
Okay.
Yeah.
First session time, 10, 30 am October 22nd 2020 to $2 63 for the records a Spotify Hi, My name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the Spotify third quarter 2022 earnings call I would now like to turn the conference over to Brian .
<unk>. Please go ahead.
Thanks, Operator, and welcome to Spotify is third quarter 2022 earnings conference call joining us today will be Daniel <unk>, our CEO and Paul Vogel, our CFO , we 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 <unk> Dot com.
Oh dot com and using the code hashtag Spotify earnings Q3, 'twenty two 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 you can email investor relations at <unk>.
IR at Spotify Dot Com and we will add in 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.
Paul 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> financial measures reconciliations between our Srs and non <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 let's turn it over to Daniel Alright, Hi, everyone and thank you for joining us.
I Hope you have the time to review our results and as you can see it was another solid quarter user growth and subscriber growth keeps humming along very steadily.
<unk> said it before but it can't be understated topline growth in the platform is the leading indicator for future success on all other financial metrics.
I wanted to start by addressing the macro environment, which I know is top of mind for all of you. There's a lot of global uncertainty, but for Spotify. Our business continues to perform very nicely around the world and outside ads, we aren't seeing much impact at all and the ads business is still growing and will be important but it remains a relatively.
<unk> portion of our overall revenue today.
So if you recall at our Investor Day in June I said that I suspect. Many of you think Spotify is a great product yet at the same time you May also think that we're a bad business.
<unk>, a business with bad margins for the foreseeable future.
And our Q3 results clearly show that our investments in the product and experience have resulted in strong user growth retention and increased engagement, but they've also been a drag on near term margins just to remind everyone. This is all consistent with the strategic decisions we communicated in early 2021.
And again at Investor Day, So as we've said we expect this drag on margins to start to reverse in 2023.
I also shared at Investor day, LTV, the lifetime value of a user is the primary tool we use to inform our business decisions and judge whether our strategy and investments are working and achieving better outcomes and the beauty of LTV is that it factors in the longevity quality and value of the relationship we have.
The user it is a critical metric to all teams at Spotify.
And we're constantly experimenting with what leads our users to stay longer engaged more deeply and ultimately convert to our paid offerings and what we've seen time and time again is how sticky our users are because of the product and experience that we've created and I believe we have the lowest churn across our competitive set.
Because of the many ways, we keep listeners engaged and happy and therefore retained.
And because of the strength of this relationship we know that spending to acquire new users is a worthwhile investment that overtime will have a meaningful return.
So here's how we think about it this trade off is worth making if our actions result in an increase in lifetime value of a user and we also maintain a healthy customer acquisition cost to LTV ratio.
But I also want to reiterate that we are keenly aware that this is an uncertain time and the cost of capital has increased.
Inevitably you should expect our hurdle rate for new investments to be higher and consequently, you should also take this to mean that we will be more selective with our overall spending moving forward.
We will make new investments with two criteria in mind first it must be accretive to margin of the investment periods. Given this new hurdle rate and second over the long term that investment must strengthen our value proposition to users and creators alike.
This said new opportunities will likely emerge in downturns as an example, we may find that our customer acquisition cost goes down as the cost of advertising typically declines in a softer market. This would then offer us a clear opportunity to grow our market share even in a challenging economy because.
We can acquire users at lower costs relative to LTV. We saw this dynamic play out in the beginning of the pandemic and we benefited from it and we expect we would do so this time around should the opportunity present itself as well.
And this philosophy is not new for those that have followed us for a while but I realize that this may frustrate. Some of you who would prefer we manage to the quarter. Some companies do just that and I guess, that's what some investors look for it especially.
Especially now in this show me markets, but simply put I don't think that's a winning strategy long term nor is it the right one for Spotify.
<unk> been transparent that 2022 was going to be an investment year, which would result in a drag on our gross margin in the short term. This quarter is case in points, but it shouldn't come as a surprise that nothing really has changed with our fundamentals. Our business is strong we are heading into 2023 with more cost certainty stronger <unk>.
<unk> and a better user.
Proposition. So this is all playing out largely as we expected despite the macro environment.
Our confidence in our ability to meet our long term goals and ambitions, we laid out at Investor day remains unchanged and based on the strong demand for our platform amongst consumers and creators this quarter I believe we will deliver.
With that I'll hand, it over to Paul to go deeper into the numbers and then Brian will open it up for the Q&A. Thank you.
Great. Thanks, Daniel.
Thanks, everyone for joining us.
I'd like to add a bit more color on our operating performance and highlight what we're seeing with respect to the macro environment and then touch upon our outlook.
Starting with our strong user performance total monthly active users grew to $456 million. In Q3. This was the largest Q3 net additions in our history and excluding our exit from Russia. Our year to date net additions are at a record high and we expect this to sustain throughout year end.
Moving to premium we finished the quarter with 195 million subscribers 1 million ahead of guidance, thanks to broad based strength across regions, particularly Latam.
Our revenue grew 21% year over year to just over 3 billion in the quarter. This was slightly ahead of guidance driven mostly by foreign exchange.
Our advertising business grew 19% year on year on year and was led by strong double digit gains in our podcast business. While this overall result was a bit below expectations. We continue to see encouraging signs that our AD strategy is working despite some of the near term macro headwinds and particularly the continued strength and interest in span.
Turning to gross margin gross margin of 24, 7% was below guidance by 50 basis points. There are three factors that contributed to the results and in order of significance.
First the expected renewal of a large publishing contract outside the U S resulted in an accrual adjustment this quarter.
Adjusted reflected revised estimates spending the previous nine quarters and while the amounts were immaterial in any single quarter taken together they added up to a material impact in Q3.
And second like many we did experience some impact to the topline advertising growth from the macro slowdown and this shortfall had a modest impact on margin.
And third currency fluctuations, mainly the continued strength in the U S. Dollar had a small impact on cost of revenue historically currency has had a big impact on operating expense.
<unk> had minimal impact on cost of revenue however, given the significant strength of the dollar it does start to impact gross margin as well.
Taking a step back we don't see anything in the results to change our view of the margin potential we laid out at Investor day.
Importantly, we view the publishing renewal in this quarter along with the recent proposed settlement related to the U S. CRB on phone are records for rates is very positive developments they offer greater cost visibility and taken together. These two deals are consistent with the profitability targets, we communicated to you at our Investor day.
Looking at operating expense growth in the quarter was slightly lower than forecast on a currency neutral basis, however, currency fluctuations through greater than planned when combined with our modest variance in gross profit or operating loss was slightly below guidance currency continues to be a big impact, adding $85 million operating expenses are just over 14 percentage points.
A year over year growth.
On free cash flow, we generated our 10th straight quarter of positive free cash flow. We can see we continued to generate roughly $200 million in free cash flow on a trailing 12 month basis and given the timing within quarters. We may see for a free cash flow turned negative in Q4, but we still expect to be free cash flow positive for the year and moving forward.
Turning to our outlook.
Looking at Q4 and beyond as Daniel said, we continue to monitor the global macro environment and to date, we see no material impact outside of our ads business.
Can we get when we began 2022, we stated that we expected to see <unk> and subscriber net addition growth at roughly similar levels to 2021 as.
As we enter the fourth quarter, we now expect Mou net additions to finished materially higher by year end and we see subscriber growth roughly in line with those expectations, excluding the impact of Russia.
With respect to Q4, <unk>, we expect it to be up mid single digits on an as reported basis.
On the advertising front, we are seeing some modest improvement from where we were a month or two ago, but the macro environment is still has a reasonable amount of uncertainty as such we expect another quarter of decelerating growth in Q4, but we continue to remain confident in the long term potential of the business.
Our gross margin outlook for Q4 is 24, 5%. We recognize this is likely a bit below what many of you are expecting based on the commentary exiting our Q1 results for a gross margin of around 25% for the balance of the year.
<unk> seen these figures is primarily a result of three factors.
<unk>, including the softening macro environment over the course of the year, which is reflected in the current advertising slowdown.
We also see another quarter of negative currency exposure.
And last Q4 includes a restructuring charge at our podcast business, which should lead to improved productivity at select studios on a go forward basis. All in we anticipate approximately 70 basis points of impact from these three items with the impacts spread roughly evenly across each.
And in closing despite uncertain macroeconomic environment, we continue to be highly encouraged by the overall trends we have seen year to date, we laid out a vision for our business model expansion at our Investor Day, which we still firmly believe we will execute against this year. It's been one of investment in both gross margin and operating expense and while it's too early to provide any guidance with respect to 2023, we do.
Expect our profitability rates to improve relative to 2022, as we grow revenue lapsed certain investments and deploy capital more efficiently and with that I'll hand things back to Brian for Q&A.
Alright, Thanks, Paul again, if you've got any questions. Please go to slide <unk> Dot Com hash tag Spotify earnings Q3, 'twenty two we'll be reading the questions in the order they appear in the queue with respect to help people vote up their preference for questions.
And our first question today is going to come from Matt Thornton on pricing can you update us on your thoughts around pricing given the recent increases at Apple music and Youtube family and then secondarily is there any update on hi Fi as either a feature or a separate premium plan.
Yes.
So this is Daniel so so maybe just by way of context. So in the last two years, we've actually done more than 46 price increases in markets around the world.
And I mentioned this on the earnings calls before but the results from these have been conclusively the same which is it's been as good as we would have hoped for.
Better in many of these places so.
Take that to believe that we have we believe we have significant pricing power on this and that we're offering an amazing.
<unk> value proposition and Thats, just keeps improving with our improvements in the service.
So I think when our competitors are increasing their prices that's really good for us.
Again, with our deep engagement that we have and the lowest churn of any competitor, we would likely fair better. So we're set up super well for the coming years.
And again in specific mostly to the U S base price increases it is one of the things that we'd like to do.
And this is a conversation we will have in light of these recent developments with our label partners.
Yes.
I feel really good about sort of this upcoming year and what that means and pricing in relation to our service.
Alright next question is going to come from Doug Endless on gross margins. How confident are you in 2022, representing a near term trough on gross margins with inflection in 2023 as laid out at the Investor day, what are the key drivers and is there anything that could derail that trajectory.
Yes, so I'd say at a high level, we still remain very confident with the margin profile and margin guidance, we gave at the Investor day.
We set a number of times to 2022 is going to be an investment year, you've seen it show up in both gross margin and on the operating expense line, we expect to see improvements as we move into 2023.
We've talked about particularly things like podcasts, there has been a drag and that should turn into a less of a drag and then eventually a benefit moving forward and nothing has changed at all in terms of our expectations. There. Obviously there are some macro uncertainty so the speed of that turnaround could always be impacted by a quarter or two or at least the slope of that turnaround.
But when you look at sort of the guidance. We gave in terms of when we think we could break even and the impact of something like podcasts are over the long term nothing has changed at all in terms of our expectation. So we.
We still feel really good about it obviously the macro could could impact a little bit the overall speed of that trajectory, but we don't see anything impacting kind of where we're headed at all.
And maybe my additions to that so if you really separated out from the business standpoint.
You can really think about it as two major parts of the business at the present moment with more being developed with audiobooks et cetera. So the two major parts is obviously our music business side and then it's our podcasting business side and as Paul said on the structural side on podcasting, we believe that to long term be a much higher gross margin business than the one were current.
And the music simply because.
The way to mimic that would be to look at platform type of businesses that usually end up having a higher gross margin.
And then the normal services and then on the music side.
In the prior question came a question about pricing so any pricing, we would do would be accretive to that business too.
As mentioned, we have been selective in doing it during the pandemic.
In macro environments, and we will do so opportunistically too, but if you think in light of our competitors raising prices that obviously gives us more confidence going into two so.
<unk>.
We're very bullish long term that we will get to these.
The numbers that we outlined during investor day.
Okay next question from Mario Lu.
You recently launched your own site to sell tickets to live events, how is it performing versus internal projections and does this move the needle for the roughly $200 million of marketplace revenue expected in 2022 and healthy double digit growth in 2023, given at the Investor day or was it already embedded.
Yeah.
I'll start with this one and maybe Paul can add to it. So first I actually think you are kind of conflating two parts marketplace does not include the live business just to set the record straight there. So we feel really good about the marketplace business and how that's developing and we feel really good separately to that of the life business.
Although it's very early days, so lots of experimentation of just enabling more ticketing to be available across the Spotify that ticketing in turn have drove better results of more people are seeing more tickets and therefore us theyre seeing more tickets conversion rates and overall ticket sales has improved too. So it's early days.
I can't disclose any numbers, just yet, but we feel encouraged by that part and then in regards to the numbers that we gave around marketplace. That's completely separate from that but we feel really good about where we are with marketplace business, yes, nothing else that other than the marketplaces has sort of been trending in line with expectations throughout the year.
Okay next question from Rich Greenfield.
Daniel you appear increasingly frustrated with Apple what would you like to see them do that they are not allowing today can you give us a couple of examples of issues that are problematic for Spotify.
So can you update us on the Google play partnership from earlier this year.
Yeah sure rich so.
Really at the core of this is the same argument I've been saying now for about four years switches. Our view is that this is next great battle from net neutrality.
And to what I call the platform neutrality wars and the key part that we want to do a Spotify is we want to have the ability to communicate with our customers. The way we choose to do that and the way our customers are accepting to have that line of communication, we do not want a gatekeeper or a monopoly in the way to dictate how we communicate with our customers.
The second part of that is we think that there ought to be.
Payment method.
Sure.
By this so.
Really allow us to use whatever payment method, we think is the optimal one and that the customer wants to use and.
And that's important in the last part is having the same axis. If you are a platform that offers a competing service.
On that platform, we want to have access to the same level of Apis that you would offer your own surface. Those are the three big things.
Case in point actually there is a new York Times article that I would just pilot recommend all.
Of you on the call today too to read.
I think it just highlights again, what's happening there, but the short just of it it's a pretty lengthy article but the short just have it as apple keeps putting up roadblocks of just stopping us more and more and more.
The App was rejected three or four times at present moment.
Really despite us having a lawyers in the room to make sure. We were compliant with this so they keep moving goalposts, which is exactly what we've said all along.
And if you contrast that to try and the same experience now on an Android device and on Google It is a beautiful experience.
So this was just showcases that we can build an amazing audiobook experience.
However on iOS, the purchasing flows inherently broken because apple decidedly wanted it to be broken and I just think it's absurd frankly that they're allowed to keep doing this.
So yes I am.
Robby more vocal about it because it's in saying that it's been taking four years to us to get the resolution for something that's just absurd and holding every one back it holds developers back and holds creators back and its bad for consumers.
Okay. We've got another one from Doug Anmuth can you detail the drivers of softer gross margin for <unk> and in your <unk> outlook and what changes in 2023.
Yes, sure ill kind of recap with maybe some detail what I said on the on my prepared comments, but so in <unk> in the third quarter. There was a couple of things that impacted the business.
And I'll say them in order of importance. So the first was the reversal of an accrual.
As many of you know oftentimes we have.
Our relationships with our royalty partners in some of the time those contracts.
<unk> expire and as we are.
Negotiating new contracts, we estimate as best we can what we think the expenses we need to incur during that period of time normally and in most cases, we're always very conservative in most cases it results in us actually getting a slight benefit when we actually settle the contract in this case it was a very modest impact.
The reason it mattered in.
In this quarter is because the contract had been expired for over two years and so it was nine quarters worth of small little adjustments over nine quarters that we had to take in this quarter. So that was the biggest one.
The second one as I talked about was some of the AD softness again it wasn't too material about the azoff. This did have a small modest impact on gross margin and then the same thing with currency also again not something we normally call out as part of gross margin, but in this quarter the currency moves were significant enough.
It's impacted.
Just going back to the first point real quick I would say that we feel really good as I said in my comments of.
Phone are records for <unk> as well as this.
International agreement a lot more cost certainty as we head into 2023, and that's cost certainty and the and the cost of that cost certainty.
It is consistent with the model and the outlook. We gave to you at the Investor day. So we feel really good about all of that.
And then with respect to the fourth quarter.
There's a couple of things in there again.
These are probably all in equal amounts, but the AD softness again relative to some of the investments we made.
We'll have a little bit of an impact there currency again in <unk> and then as I said, there was a onetime restructuring charge for some of the changes we've made in our podcast business.
In.
A month or so a couple of weeks ago and that charge will hit Q4, which runs through cost of revenue.
Alright, I've got a question from Jason Bazinet.
Can you. Please describe the two or three primary levers you believe will allow you to expand gross profit margins 300 to 500 basis points over the next few years.
Yes, Jason.
It's really just a reiteration probably from much of what I said during the Investor day. So I would just highly recommend you to take a look at that but but in essence. When you look at it our music business has continuously improved its gross margin. However.
We had have invested in non music content quite substantially over the past few years, which meant that we were kind of at a level.
Where it looks like our topline gross margin hasn't moved much at all in that process.
And so so the belief is that we can keep expanding our margin on the music side and as we've said before.
This heavy investment that we've done on the podcasting side is.
He is going to reverse in 2023 asset starts moderating.
And then last point I would just add as to say that structurally.
As the revenue mix shifts to.
More and more non music content. So both podcasting, but also audiobooks et cetera, those gross margins in those categories is going to be significantly higher than the ones. We've had in the music business too. So that's going to be a net positive as more and more of the revenue start shifting to those categories.
And that adds up to the gross margin improvements that youre talking about and then some when you look at the sort of long term improvement.
Alright, another one from rich Greenfield of time on competition the elephant in the room question as Tictoc expanding residue to more markets as they hire music industry executives curious how you think about the threat given tictoc is importance in anr in music discovery and how Spotify is positioned.
Yeah. So first.
First off like many other.
Technology founders.
Im very impressed with how <unk> has been executing.
Obviously, it's been for middle to watch their growth and how well they've been executing throughout the year. So we take it very seriously when we look at that.
Now that said we.
We have been in markets, where the rest of for quite some time and we have seen considerable growth.
In those markets.
So I feel really good about our competitive position as it relates to that.
So I feel good about yes, we know that they're there they're investing in it when they've taken share they haven't taken share from us it's been from others, we keep watching it however.
And the key again is the only real competitive advantage I think in tech is to move faster than everyone else. So this is also part of the reason how you should look at our backdrop of investing so much as we have done in this past year, because we want to move faster. So I mentioned this in the last earnings call, but the number of <unk>.
<unk> that we do the number of product improvements that we do each quarter's metrics that I look at and.
That's probably the most important leading indicator for long term success. So.
That makes me feel good because we've really kind of improved our product velocity over this year and.
I think youre starting to see it already in the product, but you will certainly start seeing a lot more of it coming into 2023.
Alright next question from Doug Anmuth.
What is the Spotify of machine look like in five plus years, what gives you confidence that Spotify can have as much success with audio books and other products as it has with podcasts.
Yeah.
Sure. So so first and foremost just as a reminder for people what the Spotify Machinists, it's really a framework of how to think about Spotify, where the predominant way to think about it is that it's one user experience share.
Shared across many verticals of content.
And what that enables us to do is to leverage all of the key technology. So all the pillars that we built spotify throughout the year, So freemium personalization ubiquity.
All of those facets.
In addition to that obviously and it enables us to go and take the scale of the existing audience base and cross sell to new verticals to gain ground faster. So when you look at that from music to podcasting.
The reason why we've been so successful is because we've been able to up sell people who've never listen to podcast before to start listening on Spotify and that is what got us to the number one position in podcasting and so our belief when you look at the audiobooks market is that while our books is a pretty big industry audiobooks is still a niche offer.
<unk> only enjoyed by tens of millions of consumers around the world.
You think about that from first principles, it's pretty clear that audio books should be something that should be enjoyed by hundreds of millions of people. If not 1 billion people around the world. So to grow that market is absolutely key for us and so the way to think about the Spotify machine as we are investing in.
Better freemium experience better personalization better ubiquity experience that then.
It's more and more of these verticals and in addition to that you should expect us to add more and more of these verticals.
So thats.
We can get to sort of double whammy and in a way I actually think about that if you want an analogy.
Theres, probably healthy ones on the <unk> business sides, where we're the hard thing was to get distribution and get the customers in the door, but then.
Our sales force to someone else than kept adding more and more.
Products to leverage the existing distribution channels that they built so you can think about the Spotify machine is our ability to do that to where we're going deeper and deeper into each vertical with more and more of the business offering but leveraging the distribution we have to consumers.
So theres plenty of opportunities to expand in the coming years.
Alright next question from <unk> Levi on Podcasting can you provide more color on podcast engagement and your expectations to reach profitability in this part of the business.
Yes, so engaging and podcast has been strong we've seen podcasts Mou as a percentage of our total Mou continue to increase it was up again in Q3.
And then podcast consumption per podcast Mou is also up year on year. So we've seen really strong strong trends in general across all of podcasting.
And as we continue to build out the tools and services to monetize continue expand the audits continuing to grow reach.
We feel like we're right on track with our ability to generate the profitability that we mentioned earlier on the call and also at the Investor Day.
Alright next question from Deepak your fourth quarter guidance implies premium subscriber net adds of $22 million for 2022 versus $25 million in 2021 and $31 million in 2020, what's the right way to think about annual net sub adds for 2023 and beyond.
Yes so.
Let's first look at 2022 keep in mind that that number in 2022 includes <unk>.
Russia, and the impact of us exiting Russia, and so when you look at it more on an organic year over year basis, 2021, and 2022, we're very similar in terms of net additions.
Just have to back out the impact of our withdrawal from from Russia, which was was was impactful. So that's number one so are you looking at comparisons.
And then second we haven't given any guidance on 2023, yet we'll do that.
And our next quarter call. So we feel really good about the subscriber growth we've had.
This year and like I said, if you back out Russia.
It's right in line to even slightly better than our expectations.
Alright, Deepak has got a follow up on gross margins can you unpack the gross margin expectations between premium versus ads in the fourth quarter guide and more importantly, how should we think about the premium gross margin expansion in 2023.
So.
When you look at what we've reported.
Obviously, any we talked about overall gross margins, but any of the overall weakness or softness in Q3 on the revenue.
Revenue side is getting back to the ads business from a gross margin perspective.
And they wanted the premium side and most of the other impacts on consolidated gross margin are going to kind of be evenly distributed across both.
And again as we look into 2023, I'll just sort of reiterate what I said 2022 has been an investment year. We've had a couple of things in Q3, and Q4, which ive identify which are.
Which have been an impact on the on the Q3 and Q4 gross margin.
But we look at 2023 as a year, where youll start to see the dynamic of revenue and cost growth start to reverse.
As Daniel mentioned, we're continuing to look at and be thoughtful about how we green light.
And deploy our capital and we still feel really good about the long term model and the profile. We gave to you at the Investor day.
My only addition is I kind of said this comment already but I think you should expect to music margin as it has been to keep ticking up but.
We'll sort of negative drag on margin had been the podcasting side.
And that is also a lot more within our control in terms of how we allocate the expenses.
On that part of the business as well and we've been investing quite heavily.
Alright next question from Eric Sheridan on the AD market can you talk about the current state of trends that Youre seeing.
With respect to audio digital advertising, especially any nuances by type of advertiser or geographic impacts also anything on exit velocity to the AD business in September that you can share.
Yes, so from a geographic perspective.
We saw the.
Softness really mostly in EMEA.
A little bit in North America, but we saw it in EMEA.
Obviously, the war and the economies are going back to those businesses.
Even in places like the U K, we actually had some some pause advertisement for a week around the Queen's passing which also impacted our business and so we definitely saw it most there from a geographic perspective.
In terms of exit velocity.
When you look at.
October is a little bit of a nuanced answer we obviously you've seen some of the trends.
Kind of moderate throughout Q3.
If you were to have kind of look at where we were a month ago to where we are now the October numbers look a little bit better than where we thought there'd be a month ago, but there's still uncertainty in those in those numbers.
Hey, Paul you should probably mention what you told me before two about sort of the uptake from <unk>.
Advertisers.
All such great point, so one of the things that we look at to monitor the health of the advertising business and kind of discern between what's macro.
And what is structural is when you look at spam and you look at the number of advertisers that are participating in span that continues to move up and so even though the macro may impact how much they're spending in any one period of time, which is obviously macro needed macro related when you look at it from a pure structural standpoint, we feel really good about what we're offering and the number of advertisers are.
That are participating in that ecosystem and so the fact that we're seeing that up year on year and continued to grow.
Shows us that we believe that the overall structural health of our of our of the ads business that we are building a spotify is very healthy.
Yes.
The only two additions.
As a piece of context for everyone on the call is on the one hand.
As Paul said the important thing is to decide whether this is a cyclical or a structural thing and it's our firm view that this is more cyclical than structural so the long term growth of digital advertising is still going to be healthy we believe.
And Theres more offline dollars does can move to digital dollars, but in regards of audio advertising as well I think we are in a great position because relative to the competitive marketplace.
There's a lot of.
Services and platforms out there that offer video advertising and display advertising, but that isn't competition to each other and if you think about Spotify now in relation to all of that.
If you want to advertise by Al audio and in this case, you want to reach customers in the car or as they're commuting. That's just one example, or on the go on mobile devices. Spotify is the place to advertise for them. So I think we sit in a very different bucket, then and advertisers are thinking about.
If they are going to spend a video dollar.
There's plenty of places to think about what to do that where there is much fewer on the audio side and it's really one leader which is Spotify.
And then in addition, I do want to highlight.
Highlights.
Perhaps something that's obvious but adds is just a very small part of our business at current state. So any headwinds in the advertising business for US is just a lot smaller than it is for platforms that solely rely rely on apps. So when you think about our product roadmap I would suspect that when you compare that to some of the other platform companies.
We have to realign and redo quite a lot of their product roadmaps based on the headwinds that theyre seeing because its just pretty material for them, whereas for US. This is a much smaller part of our business.
And it's important long term, but in the short term it impacts us a lot less when there are headwinds.
Alright, we have got a question from Steven Cahall on pricing. When you think about price increases had a label terms impact your thinking is there scope to align interest by agreeing that incremental pricing, we'll pay a lower share of royalties. So UN labels share in the upside.
Yes, I mean, I can't comment on the specifics on any of the label terms, but again any price increases that we choose to do should be net net a win win for both parties. So that's definitely part of any conversation when we're talking about pricing.
With our label partners as you could imagine even in the past and in the context of the 46 price increases we've already made.
Alright next question is coming from Benjamin Black.
Could you talk about the launch of audio books, what the early takeaways.
Have been or any feedback you can share on how do you envision in evolving the product from here.
Yes, again, it's Super early days.
So I think the really healthy metrics for me is to look at engagement and retention among the audiobooks purchasers that we're having in that looks.
Okay.
Just very solid.
It's early but good engagement overall, we see it being additive to all the other engagement that's happening on the platform, which was our hope ambition. So it's nice to see that being played out now that said and as I said earlier in the call. The purchasing experience in particular on iOS has been below expectation on our side.
That's obviously without our control and it's something that we're working on trying to improve and I feel good about where we will end up in despite of all of that in 2023 and that will allow us to scale. We kind of knew this was one of the possible scenarios and we had been planning for that but I'm disappointed obviously.
Asleep.
In all this apple back and forth.
Alright. Our next question is going to come from Brent Shafer.
What needs to happen for discovery mode in the two sided marketplace to take its next step and continue to expand premium margins.
Yeah.
Overall, it's really two parts of this two sided apart one is demand and.
The other one is obviously supply so if you think about it in very simplistic terms.
More artist more releases participating helps on the one side of it and then have more inventory.
Hi, a demand from consumers and seeing that.
Our marketplace type products.
Helps with that and so it's a constant sort of.
Sort of.
Pulling the levers on both sides for us to try to expand that and that's what we're doing.
And it's kind of more of the same really rather than any major innovation.
The other thing I would add is.
The within the question sort of implying that the marketplace isn't helping margins, it's actually helping margins a lot. We've just chosen to take some of the benefit from the marketplace growth and reinvested in our business, which is why you haven't seen the consolidated gross margin expand but we feel really good about about the benefit we've seen from marketplace and its ability to drive.
And in the future.
Again, right now Thats, just being masked by some of the investment we've chosen to make again not like a broken record, but kind of what we've talked about throughout the 2022.
Alright next question is going to come from Justin Patterson can you discuss how you're thinking about the pace of head count investment in this environment are there opportunities to slow opex growth and focus more on productivity.
Yeah well.
As I said in my opening remarks.
This is definitely.
We're keenly aware that this is a very different macro environment than the one we previously had been in before and I know.
Some investors may not think that eye care, because I'm focused on the long term, but I do.
So for me what that really means that cost of capital has increased and when cost of capital increases that means that the hurdle rates that we're doing for any new investments needs increase.
In addition to that we had already planned to probably slow down some of our opex increases for 2023, but obviously in light of even more uncertainty, it's even more prudent to.
Take a look at those numbers and obviously manage through that.
That opex side much better than we have in Paul can probably share more context on that but I just wanted to say that from my side, Yes, I mean, obviously, we'll give more guidance and clarity on 2023 on our next earnings call but.
As I've said a couple of times I think you can expect that dynamic of our revenue growth and expense growth to flip from where it's been over the past couple of years.
We start to see.
That focus shift and sort of how we manage the business and we invested a lot in this year to set ourselves up for the future in terms of people and product and being able to build what we needed to have and then the hope is to start to leverage some of that investment over the next year or two.
Alright, we've got time for a couple more questions here.
The next one is going to come from rich Greenfield.
Are there ways to be more innovative on price and functionality on your service. Besides an all you can eat product for a fixed price.
Yeah, so sorry.
I think the high level way of thinking about it as Spotify is predominantly up until now been a subscription as you say all you can eat service.
All that said.
A few years ago, we started investing in advertising being down the way. So you can think about racing arcos is a combination of either being on subscription or either on ads and it's kind of interesting to see how how people are blending the two together now and on the video side, so that might be an opportunity where consumers may not see the price.
One is increasing but effectively the ARPA is increasing so thats one and then the second part is Ala carte to the mix too. So as you can see the other way to race ARPA and you've seen us do that now a few times you have audiobooks, which has bought Ala carte.
You'll also have live concert tickets. That's also now bought Ala Carte. So that's really the three modalities of revenue playing together rather than thinking about us as predominantly a subscription service, even though obviously, that's where the majority of the revenues come from today. So I think that gives us a lot more flexibility and then we are.
<unk> innovating quite a lot on the all you can eat model in particularly in southeast Asia. So you should take a look at what we're doing there if you want to see some.
Sort of early indicators of things that we might scale if it makes sense.
Two other parts of the world there too so lots of innovation on.
I took it to mean sort of ARPA increase rather than price increase over the coming year.
So a lot more to come there.
Alright, we've got time for one more question Thats going to come from Deepak on podcasting.
Can you discuss your return expectations on podcast content investments for 2023, and as the rising cost of capital environment.
Causing you to revisit the planned levels of investment in podcast.
Yes, I would I would probably answer this question a couple of different ways. One is we look at all of our content investments through the lens of returns and the impact on LTV across all Spotify. So we're going to continue to lean into.
Looking at every investment, we make and is that increasing or decreasing and having a positive impact on ltvs. So that's number one.
Number two is I think as Daniel mentioned that cost of capital has gone up and so any investments we make any continued growth we make the hurdle rate is definitely going to be higher moving forward and so we'll continue to.
To be thoughtful and careful about how we commit our capital and then third not surprisingly we are constantly.
We'll be looking at and.
And modeling out the impact of both our content invest investment as well as the advertising that goes on top of it as well as any benefits, we get to engagement and user growth and looking at the three of those combined to.
To make decisions on how much we want to invest going forward and that nothing will change in that sense.
Yeah, and my only addition to that is as we said at Investor Day, we were expecting margins to improve in.
2023, and that's obviously a function of us.
Growing revenue.
Faster than we're growing content cost.
That's been our plan all along for 2023.
And been.
<unk> been consistent with what we've been communicating before.
Alright. Thanks, Thank you Deepak and thanks, everyone for the questions that concludes our Q&A session and I will turn the call back over to Daniel for some closing remarks.
Alright, well, thank you, Brian and thank you everyone for listening to today's earnings call.
I'll really close by saying that with one quarter left in a year, that's seen war, a lingering pandemic inflation supply chain disruption and threats of a global recession.
Really proud of all that we've accomplished and that despite all of this were precisely where we thought we'd be.
And while there may be roadblock more roadblocks than there were in the past we remain incredibly confident in the course, we've chartered ending the destination, we mapped out for ourselves and we will be more nimble and more prudent at the times demand for more details and more context, please check out that for the record podcast level dropping.
Later this evening, thank you everyone for tuning in.
Alright, and that concludes today's call a replay will be available on our website and also on the Spotify App under Spotify earnings call replays, thanks, everyone for joining.
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