Q1 2023 Spotify Technology SA Earnings Call

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Good morning, My name is Joanne and I'll be a conference operator today at this time I would like to welcome everyone to Spotify is first quarter 2023 earnings call.

If you require operator assistance at any time, Please press star zero.

I'd now like to turn the call over to Bryan Goldberg head of Investor Relations you May begin your conference.

And 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> financial measures reconciliations between our <unk> 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 I'll turn it over to Daniel.

Alright, hey, everyone and thank you so much for joining us as we open this call I really can't help but feel a tremendous amount of his heitman about the progress our team made this quarter. In fact this quarter represents our strongest Q1 since going public and over the last few months, we've celebrated a fee.

Few significant milestones, including surpassing over half a billion users and reaching more than 200 million subscribers.

Further our user growth exceeded our expectations by $15 million and our subscriber numbers by $3 million and at our scale. It it's pretty remarkable to see this level of reacceleration in our user growth, but it is a trend that's been consistent now for over the last five quarters in fact, the last two.

Two quarters saw the largest mou growth in our history.

The outperformance was broad based meaning growth was pretty evenly spread across every region without a single market dominating and on top of this we were able to accomplish this level of growth with lower marketing spend we look at this as a promising sign but it's too early to draw any conclusions yet.

And as you heard me say repeatedly over the years, a healthy topline user growth is the leading indicator of our ability to achieve future success on all other financial metrics and when we successfully attract new users. It's only a matter of time before the conversion rate of subscriber increases, which then of course drives our revenue upwards.

Over the long term and this is a formula that's been worked for us exceptionally well and one I fully expect to play out again.

And speaking of long term I want to spend a moment talking about our approach to investment timelines and the outcomes. They can deliver when we stay on the course. So let me give you. A recent example for those who are turning to our March three months' event, we unveiled numerous greater tools and debuted in an entirely new and updated Spotify experience.

Including a first of its kind AI D J and these changes mark the biggest updates to our user experience since we introduced mobile more than 10 years ago, but of course. This didn't happen overnight. These are things that we've been building on over the last 12 to even 18 months and in some cases, even a loss.

<unk> and as we shift to rolling out these features as well as several others across our 184 markets, we're seeing an acceleration in Mou retention and subs.

And sometimes our investments manifest themselves immediately but more often than not they're impact, it's gradual and takes shape over several quarters or sometimes even years and while we really cant anticipate when the benefits will materialize. We do know that our growth is a consequence of our relentless pursuit of learning.

Iterating and improving we make strategic investments and we wait for the results to compound.

Proving out the benefits for users creators and of course, our other stakeholders and by delivering an exceptional experience that is centered on creating value for the stakeholders over time, we're seeing a correlation with a stronger financial performance.

I've often talked about the fact that our success is not attributable to just one thing, but literally hundreds if not sometimes even thousands of improvements that we're investing in and working on in parallel and that's not to say that every one of them ends are producing the outcomes, we strive for but over time the things that do work.

They do add up and together they have a compounding effect.

So think of it really as waves of innovation investment and improvement there is an ebb and theres a flow over time, but over time, it really becomes more predictable and produces steadier results and the key them. It seems is to maintain a long term focus to help us navigate the current short term uncertainties.

But don't let all my talk about the importance of long term investing allow you to believe that we are rethinking our commitment to driving efficiency. So as many know last quarter and building on what we shared at last year's Investor Day, I talked about shifting towards becoming a more efficient company. There's really no question that we have become leaner in the last six months.

But this progress is still early in its reflection on our financials.

The actions, we've taken coupled with other opportunities to reduce spending in areas like marketing and content production and real estate should lead to a steady progression of key metrics throughout the year all of which makes me even more bullish about the remainder of 2023 and beyond and with that I'll turn it over to Paul for more detail behind the number.

And then Brian will open it up for the Q&A.

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

Let's start with Q1.

User growth was exceptionally strong in the quarter total monthly active users grew to $550 million. In Q1. This was 15 million ahead of guidance up 26 million quarter over quarter. The largest Q1 net additions in our history and the second largest all time only surpassed by Q4 of last year.

The strength was broad based and we hit record Q1 net additions across nearly all age demographics in both developed and developing regions.

Going to premium we finished the quarter with 210 million subscribers 3 million ahead of guidance. Thanks, once again to broad based strength across all regions.

Engagement trends were strong in Q1 with healthy uplift to year over year growth in content hours per Mou across all platforms. We also saw positive trends in our Dear you to MAA ratio as well as in churn.

Our revenue grew 40% year on year, topping 3 billion in the quarter results in the quarter were just slightly behind forecast as premium revenue slightly outperformed offset by very modest underperformance in advertising. This marks the first Q1, and Spotify history, where we surpassed $300 million in AD revenue.

Turning to gross margin gross margin of 25, 2% was above guidance by 30 basis points move.

Moving to operating expenses growth was lower than forecast helped by less marketing spend and plan when combined with a better gross profit operating loss was ahead of guidance by $38 million to better better than planned results. Also include 44 million of severance related charges.

Free cash flow was a positive $57 million in Q1.

Looking ahead, it's clear we have a lot of momentum coming out of Q1 with.

With respect to second quarter guidance, we continue to see strong momentum in Mou and subscribers were forecasting 530 million Mou an increase of $50 million from Q1, and 270 million subscribers, an increase of $7 million over Q1, we're forecasting $3 2 billion in total revenue our gross margin of roughly 25, 5%.

And an operating loss of approximately $129 million.

On revenue the currency translation benefits, we've been experiencing for the last six quarters are expected to reverse in Q2 led by the weakening U S dollar relative to the euro.

As a result, we are forecasting a 300 basis point headwind to growth.

Excluding this effect our constant currency revenue will be closer to $3 3 billion, reflecting our expectation for accelerating currency neutral growth of 14% versus 13% growth. We delivered in Q1 from a profitability standpoint, we continue to expect a steady ramp in gross margin throughout 2023, as well as sequential improvements in our operating loss.

And then one final note as Daniel mentioned in his remarks, we will continue to be diligent regarding operating efficiency improvements and we'll be looking at areas such as real estate optimization.

During Q2, we hope to finalize some of these decisions and this could lead to material noncash charge during the quarter. We have not included any potential charges in our Q2 guidance, but should they occur we will break them out during our Q2 earnings report.

And with that I'll turn it back over to Brian .

Alright, Thanks, Paul again, if you've got any questions. Please go to slide O Dot Com hashtag Spotify earnings Q1, 'twenty three 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 advertising.

AD revenue actually reaccelerate it in first quarter, which would seem better than feared can you talk to what youre seeing in the AD market I E. How it performed relative to your expectations and linearity through and exiting the quarter.

Yeah as I said in my opening comments was slightly behind on the AD side about 15 about 20 million or so.

The quarter was choppy again.

Incrementally throughout the quarter, it got a little bit better.

We feel like we have momentum heading into Q2, but you know we.

I think we said similar story of trends heading into Q1 as well so it's a little bit too early to say overall I think we feel really good about our relative position in the AD market and how we performed relative to how the overall market performed in Q1 again, it was a bit up and down we miss by a small amount, but nothing really that concerns us in anyway.

Alright. Our next question is going to come from Mike Morris on AI.

Use of AI technology to create new music has resulted in concern from artists and rights holders as seen with the recent fake Drake track, what does Spotify has responsibility and allowing our preventing the distribution of created music that draws from another artists work.

Yeah, I mean first off let's acknowledge that this is a incredibly fast moving and developing space I don't think in my history with technology I have ever seen anything moving as fast as the development of AI currently.

At the moment and obviously you pointed out in your question that Theres two parts of this one is.

Our role as a platform or allowing innovation of creative works and then.

How do we do to protect the creators of the artist ecosystem that we care so deeply about it.

And so the big part of this is we.

Have that dual focus and we take that role of.

You know our Guardian.

The artist creativity and the support that we are doing for artists and creators are very very seriously. So we're in constant dialogue with the industry about these things and it's important to state that there is everything from.

What do you mentioned sort of fake tracks from artist, which falls from one bucket to everything of just augmenting using AI to allow for expression, which probably falls in the more lenient in an easier buckets. So these are very very complex issues.

That don't have a single a straight answer on how you would take the position depending on what would happen, but we're in constant discussion with our partners creators and artists.

And one is strike a balance between allowing innovation and of course protecting artists.

Okay next question from Justin Patterson on operating efficiency on the fourth quarter earnings call. You framed efficiency is a top priority for Spotify as you've transitioned to a new org structure. How are you measuring your initial progress on speed and efficiency and.

And when can we expect these efforts to roll in more meaningfully to gross margin and operating expense.

Yeah.

I'll start and maybe Paul can can add to it.

So we're early on in our new Org.

Org structure and the way, we're working but I'm feeling really good about it so far and the leading indicators that I look to.

It's really just speed of decision, making and we've really.

Driven more collaboration and more speed of decisions now than we've had probably at any other time in the Spotify history. So I feel good about that but that obviously will still take some time before that then leads into actual products that then leads to actual business results.

So I think as it relates to that we still have some ways to go before you before investors will see the actual output, but when I talked about efficiency. It's important to note that that is just one part of the equation. The other part of the question obviously on efficiencies.

Just being diligent on what we invest in and what we spend on and I don't know Paul If you want to talk a little bit more about what we're seeing there yeah I would add.

A couple of things one is I think we've talked about on the gross margin side seeing sequential improvement throughout 2023, and nothing's changed there so.

We're starting to see it come through on those lines.

Alright next question on for Matt Thornton on our subscription business.

<unk> was a little lower than expected can you talk to what's driving that I E. How did FX planned mix market mix promotional activity very versus your initial expectations and guidance and how should we think about <unk> looking forward.

Yeah.

It's kind of a combination of all the things you mentioned.

You know clearly we'd beat on the subscriber side by $3 million.

So when when we have that upside some of it came from additional growth in our family and duo plans as well as people coming on promotional and so all of those have an impact on <unk>.

The product mix, meaning more users coming in on family and duo is probably the biggest driver again, it's pretty minor in terms of.

Where it came in at IPO and it was pretty much in line with our expectations, maybe a hair below from an RP standpoint, but not material.

Okay. Another question from Justin Patterson and this is on our recent product updates Daniel could you share any initial learnings on listener and creator reactions to the new user interface with the new user interface released how should we think about the pace of product improvements and monetization opportunities going forward.

Yeah, perhaps just to start by setting context.

It was a very successful event, we've had massive amounts of feedback both from users and craters where in particular this was a crater focused events. So creators have been overwhelmingly positive about all the new tools that they now have to express themselves and to connect with their audience.

But it's also to temper expectations, it's probably one of the largest single changes in the history of Spotify. So we take that very seriously. So for instance, the new home feed that we announced is still being rolled out for most consumers in the world don't yet have access to that.

We're rolling it out slowly just to make sure we have performance dialed up and that we can react to the feedbacks and we have already made a lots of iterations.

You know with the user feedback we've gotten so.

It will be very successful when it's fully rolled out and I feel really good about that but but.

I'm using this as a moment to educate all investors and analysts as well that there are some some product improvements that we do that you just can't turn on the button on.

And there are some.

That you can and this happened to be one of those things that takes multi quarters for us to rollout. Because this is not just a feature or something else that the whole new infrastructure behind it but on whole new instrumentation for our AI tools.

Well. So it is an important piece of infrastructure that we're basically still rolling out, but I feel really good about it and the response and I think once that's fully rolled out.

We can iterate massively on top of that.

As well, but the big focus for the next few months from the teams is just really kind of rolling this out.

Sure. It's a very performance and that we can start then, allowing our machine learning and AI team can start iterating on top of that and then we'll see compounding improvements for many years just like I outlined in my initial remarks.

Okay next question from Mario Lu.

With regards to the 6% workforce reduction announced earlier this year is that the final our first round of reductions this year and should we expect any additional severance charges other than the $41 million in your operating expense in Q1.

Let me take the second part first just to get it out of the way. So the $41 million is the charge on the operating expense line.

It was actually 44 million overall, there was a small component of our severance that hit gross margin. So there's been two numbers that are floating out there, but it's 44 million in total of $41 million hit the Opex and then that 3 million that hit the gross margin side.

<unk>.

And in terms of where person nothing else that in terms of workforce reductions and I think we've talked about all that kind of Daniel take the efficiency side from here.

Yeah, I mean, the only thing I'd really add is that we have really become a lot leaner over the last six months.

But I think that progress is still early in its reflection on our financials and then what investors should probably expect going forward is.

And for us to keep looking for ways that can help us and that includes obviously everything from our real estate footprint, we will keep reviewing.

The content deals we've made are they performing not perform N and obviously have a much higher hurdle rates as I mentioned last quarter as well on any new investments going forward.

Okay. A question from rich Greenfield for Daniel would love to hear your perspective on the recent Apple versus epic ruling being able to message about paying for Spotify off platform is clearly positive, but it appears that the court largely sided with Apple.

And then would also love to hear more about your recent trip to Washington D C.

Yeah rich.

I would characterize it probably is a disappointed but not surprised with the ruling and as you rightly called out at.

It does still include the anti steering provision, which I think is very important and a good step.

In the right direction.

And I think it's also worthwhile pointing out is I've just briefly read through the judge's remarks may be getting this wrong, but I'll try to paraphrase it where the judge I think was.

Referring and reacting to the fact that there's a larger conversation going on.

In Washington about future regulation and the judge just noted that.

They were simply making a decision a ruling based on the existing law and not future regulation and this is kind of the point why I went to Washington.

I do believe new loss are needed for this and that the App store build our or all my Bill that is also called.

Is it a very much needed improvement and I had great meetings are really did from from bipartisan both Republicans and Democrats.

And then to be very.

Very supportive of the issue.

My understanding of some of these things and I think a lot of the people I spoke to.

Didn't realize there was this bad.

And for US just to kind of level set for those that may not be involved in in the intricate details. The primary issue for me is that when I started as a 14 year old entrepreneur. The Internet was this democratic place that anyone anywhere in the world could have an impact but right now we're in a place where billions of consumers are using the internet.

Early through smartphones and primarily through apps and there's literally two companies now the control.

All of that on the Internet and they can unilaterally changed the rules.

They in Apple's case can prevent us from talking to our customers and prevents customers from even understanding that there are better deals in the marketplace. So this is super important to me on a principal level I want better climate for innovation to bring progress I want.

Consumers and if they've opted into communication from our company I want the company to be able to communicate to that consumer without the interference.

Of these platforms, so and those message message message point really resonated across both the house and the Senate and across the aisle, both Republicans and Democrats I feel encouraged but it's still early days here in the U S and obviously, we've had a lot more progress on this issue lately in Europe .

Great.

Next question from Mario Lu on gross margin gross margins be guidance by 30 basis points, but saw a drag from other cost of revenue can you explain.

Watson what within other cost of revenue was the main drag and if that's expected to continue going forward.

So theres a little bit of nuance in there so let.

Can you kind of go through it. So when you look throughout 2022 and in 2023, we've seen a steady increase on the other cost of revenue line Lauder has come from streaming delivery and other compute costs that it's slowly risen.

Throughout the year and had been impacting us and so when you look at it.

Pressure on the on the gross margin as a negative.

That being said some of the outperformance we saw in Q1 actually related to that being less of a drag than we thought and starting to see some of the efficiency improvements and initiatives that we put in place starting to pay off and so while the increase that we've seen for the last kind of three or four quarters persisted the incremental increase was less given some.

The efficiencies and so we feel really good about that we've got more plans in place to continue to.

Improve that line item, which is sort of the non royalty royalty bearing side of gross margin.

So I think we were in a good place moving forward with with how that should trend.

The next question from Doug Anmuth on podcasting.

With a decent amount of hit podcast content deals seemingly up for renewal in 2023 and 'twenty four what gives you confidence you can retain exclusive talent, while not overpaying and over investing.

Yeah.

I think you're right in calling out the overpaying and over investing in and what I can start out by saying is we're not going to do that and.

We're going to be very diligent in how we invest in our future content deals.

And the ones that arent performing obviously, we won't renew and the ones that are performing we will obviously look at those on a case by case basis on the relative value and.

I would say two things here, one we have very sophisticated tools for measuring impact on the platform where.

We've talked about this at the Investor day, where we do understand the relative impact on lifetime value and our subscribers and so on and so forth I think that helps us paying a fair price or understanding what a fair price would be and then the second part also because we are now the largest podcasting platform that means we have a great opportunity.

Unity to amortize across a larger base.

So relative to someone that smaller we should be in a better position should we want to renew a deal because we obviously can amortize that against a larger base of users.

Okay, a question from Benjamin Black on subscription pricing.

Since you haven't raised pricing are you seeing any benefit from being the lower cost distributor.

One would think so given the outperformance in the quarter, but.

It is important to note that.

It's been fairly broad based the outperformance and just by way of context, we did raise prices in 446.

Different locations and markets last year. So it's not like we haven't raised prices and even in those markets we were still outperforming.

So.

You know I've said this before and I'll say it again I feel really good about our ability to raise prices over time that we have that ability and we have lots of data now that backs that up.

We may have been marginally helped by being a lower cost provider, but it isn't a primary part of our strategy and it's not something that we're thinking about is that we're working with our label partners.

To really work with them to figure out what's the best opportunity for us to do that and that's obviously a more complex trade where it with many other variables that I've talked about that before but when the timing is right. We will raise it and I think.

That price increase will go down well, because we're delivering a lot of value for our customers.

Okay. Another question from rich Greenfield on advertising, you've talked about advertising revenue scaling to be 20% of your overall revenue, while it's growing faster than subscription revenue. The mix Hasnt moved a lot how should we think about the timing of getting to 20% let alone 30% of your revenues.

Yeah, Rich I think we still feel really good about the ability for advertising to grow and be a larger part of of Spotify is revenue mix.

Right now there is one part of it we can control them on part we can't control. So the part we can control is to continue to build out the tools. The services the measurement the attribution all of the things that we think we are doing to bring.

And even better advertising product as Spotify that continues on and we feel really good about the advancements we've made there obviously in the last quarter or two we've been somewhat impacted by macro again, we feel like we're growing nicely and outperforming the market in our peer group overall, but the macro is probably slowed us down. So I don't really think that a couple of quarters of macro uncertainty is going to change our long term.

Our view of of how we get to 20% or even beyond that.

And for US, it's really just heads down making sure that the product and innovation is there so that when the macro does come back we can benefit as much as we possibly can.

A question from Doug Anmuth on AI D. J could you give us your thoughts on how AI DJ plays out given your launch of the beta version of stream on and subsequent copyright pushback from some of the major labels.

Yeah.

I do think it's important to kind of separate AI D. J from the sort of AI conversation. So AI D. J in and on itself I think we've had nothing but positive reactions from across the industry I think the AI push back from.

The copyright industry or our label and media companies and it's really around.

Really important topics and issues like name and likeness what is an actual copyrights owns the right to something where where you upload something in claim to be Drake and it's really not and so on and those are legitimate concerns.

And obviously those are things that we're working with our partners on and trying to establish a position where we both allow innovation, but at the same time protect all of the creators that we have on our platform.

Okay next question from Michael Morris on subscription pricing do you plan to raise price on any of your current plans during 2023 and what are the current considerations to changing pricing.

Places last year.

Would like and hope for us to do that in 2023 as well, but we're in discussion with our partners around that so that's a really a <expletive> negotiation thing, but I think maybe to up level. That's what we're trying to do is we're just really trying to focus on how can we optimize for growth and there are many ways to achieve.

Growth you can grow top line users that then subsequently will turn into conversion to premium subscribers that then subsequently would turn into revenue or you can increase our Peru on a lower set of base and you can still achieve that topline growth. So we have many tools at our disposal as we're thinking about how to.

Increased growth and the industry realizes that in our label partners realize that as well. So that's the constant dialogue that we're in but yeah, we would like to.

Raise prices in 2023, but its really a discussion with our partners.

Okay. Another question from Doug Amazon marketplace, how should we think about the outlook for marketplace growth. This year following approximately 40% growth in 2022.

Yeah, I think we're still very optimistic about marketplace and it had a really strong Q1 <unk>.

It continues to be.

A driving force for engagement with their creator community there, they're loving the tools and services. So.

We haven't given a target out for 2023, but Q1 was very strong and we're optimistic that we'll continue to sort of be able to advance all the offerings we have in marketplace.

And our next question from Deepak on Podcasting can you provide some recent.

Some color on recent engagement trends on the podcast side revenue growth is healthy even as you optimize the content portfolio. We're curious on the recent engagement trends within podcast.

Yeah. So overall.

Q1 has been a phenomenal quarter when it comes to engagement. So engagement is up more than predicted.

On pretty much every fronts of retention is higher.

The D au over Miu is higher than before and the actual engagement is higher and that's a that's a cross music, but it's certainly true on podcasting as well and we've seen a healthy trend sort of up to the right on podcasting or now many many many quarters and we're seeing how both podcast in music is.

Acting in great symbiosis together to drive an overall healthier.

User funnel.

Modify so I feel really good about the.

The mix and obviously, that's a testament to the great catalog and content portfolio, we have on both music and podcast.

I would just add one other metric listening hours for Mou is was really strong in the quarter both across across music and podcasting.

To Daniel's point on the engagement side, we're seeing a number of our engagement metrics.

Really uptick in Q1.

Okay. Another question from Doug Emmis on users given the first quarter upside in the first half outlook. How do you think about overall net adds and growth for Emma use in premium subscribers in 2023 relative to the $83 million and 25 million added respectively in 2022.

Yes, we don't obviously give full year guidance anymore.

But.

Implied in the question is sort of where we already are so if you think about between Q1 and our outlook for Q2 or just over 40 million net additions on the MCU side said, we'd be halfway to last year through half of this year and the same thing on the sub side. So about you know if we hit our guidance for Q2, that's about $12 million sub editions. So.

Again about halfway to to next year, so nothing really to.

To add other than we feel really good about the trends and the trajectory we've seen on both the user side of this upside for the for Q1 and our expectations for Q2.

The next question is from Deepak on AI, Daniel can you discuss your thoughts on what opportunities and risks there are from generative AI specifically on music creation.

Do you think these developments have potential to materially shift economics towards distribution platforms like Spotify overtime.

Yeah, well, so again to caution everyone. This is very early days and it's an incredibly fast developing space.

But I think.

It is important and I guess on the risk side would be not just for Spotify, but I think for our entire creative ecosystem is obviously.

You know.

The question around copyrights, and who owns what copyrights and what the fairway would be to attribute value when you're doing things in name and likeness situations or inspired bias or an artist etcetera I think the whole industry is trying to figure that out and trying to figure out training.

And.

I would definitely put that on the risk account because theres a lot of uncertainty I think for the entire ecosystem.

But on the positive side to flip on that for a moment because I don't think thats been as highlighted as part of the story.

One I think.

This could be potentially huge for.

Creativity on the positive side.

Go in and talk a little bit more in detail about this on our for the record podcasts.

So that's a little bit of a plug of four for you.

To listen to that if you're interested.

In understanding more but but the short of it would be if you really think about it.

With that now these conversational interfaces it will allow people.

That perhaps don't know anything about how to play a music or even know these complex software music production software tools that now create just using their voice instruct the AI to make something to sound a little bit more upbeat make something sounded a little bit more.

More like add some congas into the mix, when you're creating a drum pattern or something like it.

And that has the chance I think to meaningfully augment that creative journey that many artists to do.

And you could even imagine someone just humming something and then the AI, helping out by creating a backdrop that you could then can add it and alter into your existing door, which is the music sort of a software environment that many producers to music creators are doing and that should lead to more music.

And that more music, obviously, we think its great culturally, but it also benefits Spotify because the more creators we have on our service.

The better it is and the more opportunity we have to growing the engagement and growing the revenue.

So that that would be on the upside, which a lot of people aren't talking about and then of course, there's entirely new potential product that perhaps can happen, where you can have users, creating their own music and perhaps spotify could be a conduit of that but I think it's way too early to speculate on those types of things at the present moment.

Okay. Another question from rich Greenfield at the Investor Day last year, you talked about introducing three new verticals looking beyond music podcast and audio books when should we expect to hear more.

Yeah. So.

Obviously, I don't have anything to announce at this moment.

But in the pipeline there is two that's progressing very nicely out of the three and then Theres a few candidates of the third that's in a little bit of an earlier stage than that so.

Again, this just be kind of more hinting at that.

We have things in the work I mentioned this prior in my opening remarks. Many of these things that we are working on is not the product that's something that we started three months ago or six months ago, but we have projects.

Ben.

You know.

Being worked that at Spotify by teams or sometimes two three.

Even four years before we are ready to announce them for the world. So we have a very good sense of what those are those three two of them are right now progressing very nicely.

So we will see when theyre ready for primetime.

Great question coming from Benjamin Black on advertising.

Could you give us an update on the advertising backdrop, how have AD sales trended so far in April shouldnt.

Shouldn't you benefit from easing year on year comparisons as the year progresses.

So on the second part of the question, yes, the comps do get easier throughout the year, which will which will definitely benefit us.

And in terms of April we feel like we had some momentum coming out of March and April So that's positive.

That being said I think we felt.

But there is some momentum in Q1 and ended up being pretty choppy as well. So I think we're optimistic but also cautious maybe cautiously optimistic would be the right word because I think we feel like there's some momentum there I think we feel good about where we're positioned with an advertising standpoint, but just given the macro uncertainty I think were more.

Caveat it as cautiously optimistic.

Okay. Another question from Doug MF on podcasting can we get an updated view on timing for podcasting profitability and when should we expect to see a meaningful inflection in AD supported gross margins.

Yeah. So no change to what we said look we think we continue to see the loss the podcast and loss continue to get better throughout the year and the targets. We gave at the Investor day with respect of podcast and breakeven and then profitability have not changed so we still feel good about that.

And then the AD supported gross margins I mean, theres really two factors that are impacting that which we've talked about podcasting is a big part of that so as the podcasting.

Loss turns to breakeven and then profitability that will obviously help the AD supported gross margins a lot and then we do have some markets in regions, where our our adds gross margins are quite where they are in some of our more established and developed advertising markets and so we're still working on getting some of those markets kind of at parity with our more developed.

AD market. So it's a combination of the two but obviously the transition from from the podcast business from being a drag to a breakeven and profitability will be a big help.

Alright, we've got time for a couple more questions and it looks like Doug Anmuth has a follow up on operating expenses, you had 36% growth year on year in Opex in the first quarter with roughly half of that driven by social charge movements and severance how should we expect that to improve throughout 2023 and what are the key.

Areas of leverage.

Yeah, It's a great question and so.

And thanks for bringing it up over 36% growth about a third of that was social charges and then another 600 basis points or so from severance so.

To your point, yes, it was about a big chunk of the Opex.

Spence growth came from that.

I think youll see a couple of things one if you look at our head count from a year over year basis, we're still up as.

As we go throughout the year, assuming no changes to head count.

Isn't guidance I'm, just using this as sort of a illustrative example, assuming no changes in head count those comps just get easier throughout the year as we start to lap the reduction we had.

A few months ago, and again Q1, the year over year is pretty tough and it gets easier so that'll help on the on the leverage side.

And then you saw in Q1, we definitely had some leverage on the marketing side, where we spent a little bit less than expected and we're still able to grow users and subs it pretty phenomenally and as Daniel said, we're not reading in reading into that too much after one quarter, but it's obviously something we're monitoring to see how that goes for the rest of the year.

Okay, and we've got a question from Jed Kelly, we're seeing the stock price benefit from strong Mou growth and improving gross margins. If this continues does this play Spotify in a favorable position to negotiate a quote unquote win win outcome with the labels on any incremental price increases.

I don't know that I think the stock price.

Impacts our negotiations with our content partners. So I don't think that has any real impact.

As I tried to describe before.

Usually when we're negotiating outcomes, it's very rare that it's a single issue. We are negotiating with them. It's usually it's a package of different things that we tend to agree on so you can almost think of them as bilateral treaties.

You kind of have to negotiate them for a while and there's a lot of puts and calls into those things.

So it's a whole sort of set of discussions and there's a number of different variables that go into them in again.

I think we're ready to raise prices I think we have the ability to do that but it really comes down to those negotiations.

Alright, and our last question today is going to come from Maria rips on advertising could you discuss an or rank order what you consider to be the biggest drivers of advertising in 2023, how much of the growth will be a function of an improving macro backdrop increased advertiser engagement with the emerging.

Formats, greater inventory availability given recent investments.

Or anything else.

Yes, I think there's a lot in that question.

Look I think there's a there's a lot to our advertising growth and so it's kind of unpack. It. So some of it has been if we talked about we've invested in regionally in growing some of our.

Sales capabilities in Europe , and rest of world.

We saw some of the benefit of that in Q1.

And there's sort of an expense ahead of the benefit there and I think we talked about that throughout 2022. So that's why I'm getting some more leverage on some of the investments. We made last year just on the people side. She would be as we keep talking about were really going to lead with technology innovation here, a better measurement better attribution better targeting and those are improvements that we expect to see throughout two.

Thousand 23 and beyond.

So there'll be some benefits from that as well and then as you said the macro is the big wildcard and so it's hard to predict it.

We think that we continue to build out a platform that will be.

Really strong and will benefit when the macro.

Gets better and somebody that can still outperform even when the macro remains uncertain.

Alright, Thanks, Maria and that concludes our Q&A session for today and now I'm going to turn it back over to Daniel for some closing remarks, alright, well. Thanks, Brian in closing this was a phenomenal quarter with significant outperformance and I continue to feel really good about what we're accomplishing we closed out 2022 on a high notes.

And this quarter continued that momentum, but more importantly, we are consistently seeing that our long term approach to innovation is working.

And as we move forward with an increased focus on efficiency, we are even better positioned to translate these efforts into better business performance.

Thank you again for joining us and as usual feel free to check out our for the record podcast dropping later today.

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.

This concludes today's conference call. Thank you for your participation you may now disconnect.

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