Q2 2023 Spotify Technology SA Earnings Call
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Good morning, My name is Julie and I will be your conference operator today at this time I would like to welcome everyone to Spotify as Q2, 2023 earnings call and webcast. If you require operator assistance at any time, Please press star zero.
I would now like to turn the call over to Bryan Goldberg head of Investor Relations. Thank you you may begin your conference.
Thank you operator, and welcome to Spotify second quarter 2023 earnings conference call joining us today will be Daniel <unk>, our CEO and Paul Vogel, our CFO will start with opening comments from Daniel and Paul and afterwards, we'll be happy to answer your questions questions can be submitted by going to slide O Dot Com S. L. I D O dot com and using the code hashtag Spotify.
My earnings Q2, 'twenty three analysts can ask questions directly into slide Oh, and all participants can then vote on the questions. They find the most relevant if for some reason you don't have access to slight or you can email investor relations at IR at Spotify Dot Com and will add on your question.
Before we begin let me quickly cover the safe Harbor during this call, we'll be making certain forward looking statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ because of factors discussed on today's call in our shareholder deck and in filings with the securities and <unk>.
<unk> Commission during this call. We'll also refer to certain non <unk> financial measures reconciliations between our ifr S and non <unk> financial measures can be found in our shareholder deck in the financial section of our Investor Relations website and also furnished today on form 6K, and with that I'm going to turn the call over to Daniel.
Alright, Hey, everyone and thank you all for joining us.
I Hope you all had a chance to review our shareholder deck and as you can see it was a very strong quarter, we beat our own expectations again across both Emma and subs and in addition, it's really gratifying to see the outperformance and growth that continues to come from markets all over the world.
So let me share some more context on the growth this quarter before we go into what it ultimately means for the business for this quarter and that have the highest mou growth and Spotify history and as a point of comparison our growth. This quarter was $36 million compared to Q2 of 2022, where we saw growth of $19 million.
And this reacceleration is significant and shows that our investments in adding podcasts and improving our platform and user experience are paying off nicely.
I've talked before about the fact that the biggest driver of our subscriber growth comes from users who start on our AD supported service. It is a really powerful funnel, where the more our users discover and engage the more they're willing to pay for an enhanced experience and with six quarters of Mou outperformance. We are capitalizing on this MAU.
Mentum and is proving to have a meaningful effect, helping us achieve 10 million net new subscribers. This quarter 3 million more than we originally anticipated.
So now let's talk about revenue growth there are three ways for us to drive revenue growth. We can grow our users we can create new business with new revenue streams, and we can increase revenue per user our preference among them is the focus on growing the overall number of consumers on our platform as this gives us scale advantages and rich.
<unk> optionality for the future.
However, we've also been clear that there will come a time when price increases become a more important tool in the toolbox.
And to that end as most of you are now aware yesterday, we announced broad price increases across more than 50 markets, including most of Europe , and North America and we've carefully weighed this decision, but we felt the timing was right we've expanded value to price significantly by meaningfully improving our content offering.
And we continue to enhance the user experience and alert lowered churn and over the past few years, we have learned a lot as we've conducted over 50 price increases already and this experience coupled with our strong offering put spotify in an excellent position to make this move and while this won't impact revenue per user much.
Up until the end of Q3, we expect it to have a meaningful impact on Q4 beyond.
And finally, we continue to make progress on improving efficiency across the company as Paul will explain we have taken several actions to further streamline our operations and reduce costs, which we largely offline in Q1. These moves position us to become a much stronger business in the future. Despite making these changes in an effort to.
Create more efficiency, we have still managed to increase the overall velocity of experiments and new improvements and this gives me a lot of confidence so looking back at Spotify. The lesson. We have learned is the daily progress even if it's more important than the occasional clash of brilliance, we've had therefore I.
I believe that the speed of iteration is perhaps the ultimate leading indicator of our long term success and with that I'll turn it over to Paul for more detail behind the numbers and then Brian will open it up for Q&A.
Great. Thanks, Daniel and thanks, everyone for joining us I'd like to add a bit more color on the quarter and then touch upon the broader performance of the business and our outlook.
Overall, our usual subscriber growth was exceptionally strong in the quarter users grew by 36 million to $551 million, while we added 10 million new subscribers, finishing at $220 million, both MAA and subscriber growth accelerated from Q1, driving the highest quarterly user growth in our history and the best Q2 for subscribers on record.
On the revenue front, we grew 11% year on year to $3 2 billion during the quarter, our FX neutral growth was 14% and accelerated versus the prior quarter's results.
Let me turn now to gross margin as I previewed during the Q1 call we expected to incur charges in Q2 related to our ongoing efficiency efforts in the quarter, we took steps to shrink our real estate footprint and rationalize certain areas of our podcast business.
We also.
We exceeded our soundtrack marketplace business, we expect all of these moves to have a positive impact on our rate of profitability on a go forward basis. However, they did result in roughly a $135 million of net charges in the quarter with 44 million flowing through gross margin and $91 million flowing through our operating expense about $25 million of these charges were cash really.
<unk>.
With that context, adjusted gross margin, which excludes these charges was 25, 5% and inline with expectations. As a reminder, we guided gross margin excluding potential one time charges.
Adjusted operating loss of $112 million was better than planned helped by lower marketing and legal spend which more than offset higher than anticipated social charge accruals.
Free cash flow was positive $9 million in Q2.
Looking ahead to third quarter guidance, we are forecasting 572 million Mou, an increase of $21 million from Q2, and 224 million subscribers an increase of 4 million over Q2. We're also forecasting $3 3 billion in total revenue our gross margin of 26% and an operating loss of approximately $45 million.
First looking at user and subscriber growth, we've had an outstanding start to the year and we see momentum continuing into the back half of the year.
And to address a likely question right upfront with respect to price increases and subscriber growth. Our data would suggest that historical price increases have had minimal impact on growth, but given the breadth of this change and the significant outperformance in the first half of the year. There is some conservatism baked into our outlook for Q3, we do expect our net adds through Q3 of this year to be high.
And then at the same point last year, roughly 30% better.
And turning to revenue we are forecasting a 600 basis point headwind to growth given the continued strengthening of the euro relative to the dollar and those trends appear to be continuing into Q3. Excluding this effect our constant currency revenue would be closer to $3 5 billion, reflecting our expectations for accelerating currency neutral growth to 16% year on year.
<unk> first a 14% growth that we delivered in Q2.
We anticipate further revenue growth acceleration in Q4 relative to Q3 on a currency neutral basis due to a full quarter benefit from price increases for clarity. The recently announced price increases will have a small impact on Q through Q3 revenue given building cycles and timing Q4, we'll get a full quarter benefit and therefore.
The greater impact on accelerating revenue.
From a profitability standpoint, we continue to expect a sequential ramp in margins through the balance of 2023 as well as improvements in our operating loss and with that I'll turn it back to Brian for Q&A.
Alright, Thanks, Paul again, if you've got any questions. Please go to slide O Dot Com hash tag Spotify earnings Q2, 'twenty three we're going to 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 Justin Patterson on efficiency.
Daniel and Paul efficiency has been a major theme for you in 2023 as you look at actions taken this year and consider your long term margin targets, where do you see opportunities to be more efficient while still ensuring you have the right level of investment to support revenue growth.
Yeah, I'll I'll start and maybe Paul can chime in.
So I think again, if you go back to some of the remarks that I had at the beginning of the year.
Really really two things one the most notable thing is that the hurdle or for any new investments that we're going to make it's going to be significantly higher going forward.
And in particular, I think you should view our investments in our own to Opex.
A great indicator of that and then the second part.
As I talked about this in the beginning of the year or two which is we probably got a little bit ahead of ourself in that investment and so we've right sized our staff.
Related to that so I feel good much better about the overall opex and where we are so I think going forward you should.
Just assume that.
The numbers on a percentage of revenues should come down because we're going to not increase our opex to the same extent that we have had in past years and maybe just the final bit here as we invested on the backdrop of all the amazing leading indicators, we saw and I do want to remind all of U S investor.
Or is as well that phenomenon now six quarters of outperformance on EMEA growth that is now translating really nicely into subscriber growth as well so I feel really good about those investments, but we obviously.
You know probably got ahead of ourselves a little bit on that and now we're going to stay steady on the investments we've already made because we're seeing great results from them I don't know if you want to add something Paul Yeah, I'll just add a few things one I mean, if you look at some of the changes we made both this quarter and the beginning of the year.
Q2 was the last.
The quarter, where we had head count higher year over year, we expect our head count year over year to actually be down in Q3.
We'll see where that goes moving forward, but as Daniel said, we're continuing to become more efficient, we're continuing to find ways to innovate and launch new products and experiment.
Alright. Our next question is going to come from Justin Patterson again. This one on AI, Daniel we've started to see AI extend beyond discovery and in areas like the AI DJ.
What additional opportunities do you see for AI across the product portfolio, how should we think about AI potentially influencing podcast or even audio book growth over time.
Yeah, I think we're in the early innings of even seeing all whats potential and I assume with the question that you're talking more about generative AI than not but for the purposes of this I think there's almost three major applications. We still think there's enormous benefits of just core machine learning or.
AI improve.
Improvements.
In discovery and so that's going to be massive and you can see some of those improvements already paying off very nicely and higher engagement and higher retention, which then lowers churn.
This is a trend that's been going on now for many years. So I still think that there is quite a lot that we can do there.
That will improve engagement and retention over time.
And then the second bucket a bucket of course comes into generative AI in an AI DJ is.
Phenomenal product is probably one of my personal favorites over the last few years that we have.
Developed and we've seen really strong consumer interactions with that.
And that just talks about the ability for us to.
<unk> and personalized all the amazing content that we already have on the Spotify platform. So I think youre going to see a lot more of that where we can contextualize and personalized content.
Across the entire platform to make it more accessible so and.
An easy way to think about it as an investor is if you think about podcasting today, it's really high quality content, but it requires quite a lot for you to get into.
New podcasting, so one very easy thing we can do with these.
These new developments is of course summarize what these podcasts are about and by doing so you can imagine, it's becoming a lot more easier to merchandise new podcast for consumers with stripes.
Interim higher engagement the more growth for greater switch.
It is a really positive thing and then lastly, I would say.
Just making the company overall, a more efficient and I think this is probably the part that's.
Most people are investing in in the broader ecosystem, but not enough.
Credits yet.
Understanding among investors is happening, but I significantly believes that we can become a lot more efficient.
As the company by leveraging AI. So a great example of that would be.
If you think about advertisers today, the cost of generating new advertisements on Spotify is quite a big thing, especially on audio ads.
It takes for advertisers to to develop new AD formats and that obviously means that you as an advertiser instead of having one out and you can imagine having thousands and tested.
Across the Spotify networks things that you could easily do today using text, but you haven't been able to do over video or audio so theres going to be a lot of those opportunities, where we're going to be not.
Not just on the consumer side, but really across the entire company become a lot more efficient which will drive more value.
For all stakeholders consumers creators and Spotify itself.
Okay. Our next question is going to come from Matthew Thornton on price increases.
What does third quarter revenue guidance assume in terms of timing and subscriber guidance assume in terms of churn and gross intake and do you think of structures in place with the content owners to now incentivize regular or recurring price increases.
I'll take the first part of that maybe I'll, let Daniel take the second part of that.
So the guidance assumes on price increases the way I think about it is this way.
We announced a price increase yesterday, most people have a notice period and then.
The price increase won't it won't take effect until the next billing cycle. So for most subscribers they won't see a price increase until September .
Which is why I said that will have a minimal impact on Q3, because most of that price increase wont happen until the last month and probably somewhere in the middle of the last month of the of the quarter you won't see the full benefit of the price increase in Q4, so youll see a bigger acceleration in <unk> and revenue growth. In Q4, then you will see in Q3.
In terms of churn and gross intake, it's not something we comment on I will go back to my comments I made in my prepared remarks, which were definitely there is some conservatism baked into the Q3 numbers. If you go back and look historically and we've said this publicly many times in the past and we've when we've raised prices we've seen a very pause.
<unk> results, we've seen minimal impact on group gross intake, we've seen minimal impact on churn or variations in churn from trend.
So there's no reason to expect that wouldn't be the case. This is obviously a much larger and more broad based change that we've made in the past theres definitely some conservatism baked into kind of how Q3 rolls out.
And then maybe Dan I'll turn it over to you for the second half of that question.
Yeah.
So I think the second half it was around the structure that allows a regular and recurring price increases and I commented on that already I think you know.
Again, we have in the past done over 50 already so I don't want to overstate. This.
Price increases, but obviously this is the biggest one we've done.
<unk> and I think.
You know I I addressed it in my opening remarks, but I believe you should all look at it as a tool in our toolbox, but the overall goal as per market basis grow our revenue.
And we're trying to grow it at 20% plus we've outlined already in our targets and so so there's three ways to do that one is obviously to grow the number of consumers. That's our preferred way of doing that and keep the value to price Super high because that creates optionality, but win.
User growth.
Slows down tick, Sweden is a great example, where we're already at a massive part of the population there than price increases becomes even more important tool in the toolbox.
And then thirdly of course, we have.
Growing revenues through our new vertical through <unk>.
<unk>, which is also another tool we have in the toolbox, but of course more longer term. So yes, I think you should assume that this is a tool we now have in the toolbox.
Okay. We've got another question from Matthew Thornton on the AD market.
Can you talk about the performance and linearity of the AD market through second quarter and into third quarter and can you provide any updates on span.
Yes, so the quarter on the outside was was pretty solid relative to our expectations. We did see.
Some improvement throughout the quarter, so definitely the back half of the quarter.
It was better than the first half, although not that out of line with our expectations.
We expect advertising to be even better in Q, which is baked into our guidance. So on an FX neutral basis, a better quarter from a growth perspective in Q3 than we saw in Q2.
And then progress its fans fan was a big driver of the outperformance. It definitely helped podcast AD revenue podcast AD revenue got better throughout the quarter as well in terms of growth rate. So.
<unk> is a big contributor to that.
Alright. Our next question is going to come from Michael Morris in the past you've referenced seeking a win win scenario with labels prior to raising consumer pricing can you share detail about the when you achieved in conjunction with yesterday's announced increase will you pay royalties on the incremental revenue at the same rate.
Is your current agreements.
Yeah.
I'm not going to dive into specifics about anything in our agreements us per usual, but I will say that we're of course very pleased with where we are with our partners and we feel really good about the situation.
And that I believe again I think I mentioned this in the past, but I feel like quite often this is being put up in a situation where this is kind of a win lose relationship between our partners and all.
That is not how we see it we very much see it as us again, not a zero sum game, but a growing pie and the goal is for both parties to be win win and I feel like we're at a situation where we are at a win win.
With all of our REIT partners.
And I feel really good about the growth of Spotify, but also the growth of the overall music economy.
And that's really the kind of main focus for us as Spotify is we're really trying to create a win win and I feel like that's the part that's often missing, but we're really pleased with where we are both with this price increase and our overall position with our partners.
Alright. Our next question is going to come from Mario Lu <unk> ARPA declined 3% year on year, excluding currency in the quarter can you help break down the contribution from product and market mix and whether the price increases announced last week will be able to offset these two negative impacts by Q4.
Yes, Thanks Mario.
So.
The biggest impact on the quarter was the product mix that was the majority of the impact of the three.
A 3% decline FX neutral on <unk>.
Looking out.
The price increase will moderately help in Q3, we're looking for FX neutral <unk> kind of flat to down 1% in Q3.
And then we should expect a meaningful improvement in FX neutral ARPA in Q4, as we get the full benefit of the price increase in the Q4, so monetary this quarter call. It zero to minus one in Q3, and then nicely positive. We don't obviously guide to Q4 at this point, but nicely positive in Q4 of this year.
Great next question from Rich Greenfield Tictoc recently reached a new supposedly ground breaking deal with the labels how should we think about what this means for competition with Spotify.
Well.
And again competition is nothing new it's something that we've been dealing with since the start of the company and we have had many formidable competitors and obviously tictoc is one.
All of that said I think the results this quarter kind of speaks for themselves with the outperformance.
In users and the outperformance of the subs I feel really really good about the investments we have been doing over the past few years and improving our competitive position and improving the consumer value.
That we're having to our consumers and and yes, I mean again competition isn't anything new.
It is expected that especially in such a large category and that so many consumers care about like music.
No.
Yeah, really nothing more than that.
Alright. Our next question is going to come from Mario Lu on.
Podcast economics, the second quarter podcast gross margin improvement can you give us a rough ballpark of where we are right now versus a timeline of breakeven within the next year.
We continue to see improvements there.
The rate of improvement on the on the gross margin on the podcast side.
I would say that relative to all the expectations. We gave at the Investor Day, we're right on track, we expect to hit all the targets we laid out.
Podcast in podcast breakeven and improvement in margins.
And at a higher level I think we feel really good about all the targets we laid out at the Investor day.
Alright, and then we've got another question from Rich Greenfield.
Everyone was expecting you to raise the base single user price.
Which has never gone up but you also pushed through a $1 increase on a family plan in April of 2021, how do you think about your family plan pricing power versus the base tier.
Yeah I mean.
Again, it's phenomenal value really for consumers.
Both the standard tier, but obviously the family.
Pricing as well so we feel it's a great offering and as we said before we've been.
In the past are waiting and kind of reviewing and building up more value and that's really how you should think about it we are trying to build more value.
Towards our consumers, that's where we start and then when we feel like that gap the values of price ratio is getting out of whack you should now assume that we have a new tool in our toolbox, which is we have the ability to raise prices and we.
We feel good about doing that and the family plan of course is an even better value proposition relative to the standard plan. So that's another.
Tier that we have the opportunity to raise prices.
Okay. We've got a question from Matt Thornton on streaming economics do you think the music streaming market will get to a structure.
We're higher value was ascribed to premium music streams versus perhaps other content that may be perceived as less premium.
I think what you're discussing is probably a variance around.
Artist centric rather than the sort of difference between AD supported premium.
Parts and obviously this is kind of a big convention, how do we make the economic model.
Fair for as many participants.
On the platform and we're always making tweaks to that model. We're always reviewing how we can make the model more fair and we're in constant dialogue with our partners around how we can do that I think the expectation from an investor point of view is.
However is that it doesn't actually meaningfully impact Spotify is economics, one way or the other this is more around how we divide the pie from the rights holders and to what artists what groups of artists we should do it but most studies we've done in this is that even if you change it.
User centric or an artist centric approach it seldom leads to these gigantic differences that's most people perceive it to do so.
And we're in constant.
Discussion with our partners and we're always sharing data about what we see and they're sharing data back of course, but we're always open to hear how we can make the system more fair to more artists.
Alright next question from Maria Rips.
Could you comment on the June Bloomberg report that indicated you're planning on launching a hi Fi tier later this year what are your expectations for engagement and plan switching across different pricing tiers, if and when you released this offering.
Yeah, well, we don't really have any.
Announcements to make on this call around and then you sort of features or or or things, we tend to do that directly towards consumers when we have them.
I will say of course is that hi Fi remains something that we think has value, but it's something that has value to.
Probably and more efficient autos in the streaming market and.
We're interested in obviously, how we could use that as one tool.
Two in the future increase.
Our our value even further but we don't have anything to announce at this point.
Alright next question from Matt Thornton on the user interface, what impacts have you seen.
Engagement retention conversion or anything else from the new user interface and how far along are we in the rollout of that new UI.
So.
Again, the user interface for those.
That may not be aware.
That I believe map is referencing is the one we announced that three months.
And as we outlined back then it was the single largest shift than we've ever made.
And to the user experience both on a look and feel but more importantly on the backend because we had to re architect all of the signals that our machine learning systems, we're using as well.
And what we're seeing is pretty good results, we've made lots and lots of tweaks based on user feedback which is normal.
And.
We are making those tweaks, we're also making lots of tweaks on a recommendation based on this new signals. So I feel really good about where we are but it's an entirely new system. So we're being very very careful about how we're rolling it out.
And you should expect.
Most of it to be rolled out over the remainder of this year with this new UI, but we feel good about it and you should expect long term that engagement will increase and of course, they think engagement increases.
That tends to lead to better retention, which in turn tends to lead to better conversion over time as well.
Okay. We've got a question for Maria reps on Podcasting last quarter, you talked about canceling or not renewing underperforming podcast content could you provide some further detail regarding how your original content strategy is evolving under more streamlined operations and are there any audience demographics genre types that you're more focused on now.
Yeah.
I think you're rightly pointing it out I think the biggest shift in our strategy is really around.
The more streamlined operations and that we are being more careful about you.
Now that we have a lot more data around doubling down on renewing the things that did work and stop doing the things that didn't work and I think that's the primary consideration that we're going through and then in terms of any new genres or demographics I think the most interesting thing from my vantage point as how the number of podcasts is growing.
So youre seeing more and more new podcast has come in and do that and unlike before where perhaps.
We saw people in the very early innings that were native to podcasting. It didn't do any other form of of media.
Then when we kind of made the announcements we brought new talent to the platform now we're seeing a lot of Internet native traders, who are creating new podcasts for it and I think our video podcasting is a great example of that where you're seeing podcast theres now realizing that they have one video feed on Instagram.
Ram and Youtube and all these other platforms and now uploading more long form content on Spotify with great success.
So we're very much tailoring on the content type to these new creators and broadening the base of podcast, there's feel really good about that and then on the consumer side that tend to lead to much younger consumers getting in and starting to realize that podcasting is not just something for older consumers, but it's something that has a lot of.
Appeal it could be funny it could be not just fact.
But youre seeing call our Daddy a great example of younger women.
Taking up to podcasting and loving the formats.
And we're seeing obviously something like call. Her Daddy also then cross reference win.
When Alex Cooper brings musical artist onto the show you, we're seeing great results and music streams as well so nice sort of.
A brand Halo that then shines onto the music side as well so.
That's the expectation, we're going for more more creators, which probably will lead to more younger consumers.
All around the world as well.
And more importantly of course, the big shift being that.
It has to be efficient.
Alright next question from Doug Anmuth on sales and marketing do you expect sales and marketing to decelerate or decline year on year in the back half of 2023, given the heavy spending from 2022, and how does that influence your Mou and premium subscriber outlook.
Yes.
As you pointed out so I could definitely accelerated in the back half of last year. So when you kind of think about it on a year on year perspective.
The comps are what they are so.
That's kind of number one number two is the last couple of quarters, we have under spend in marketing and still delivered exceptional user growth in subscriber growth.
And what we've seen is after a period of time, where our LTV to Sac, which had always been pretty strong kind of dipped a little bit back and rising again and rising nicely. So we've seen a really significant improvement in LTV to Sac, we've seen an improvement.
LTV at or on a LTV to a cost per gross add perspective. So.
So we're seeing that officially come into play so.
Marketing is always going to be a part of how we grow.
It's not really a big factor in kind of the guidance, we've given on users and subs in terms of any change to marketing plan or year over year changes at all.
So I think we feel really good about the efficiencies, we've got and I think we feel really good about actually the marketing spend we made that's now carrying forward read you go into new markets. When you launch new markets and sometimes there's that awareness factor and then once you get sort of that.
For lack of a better word flywheel to take hold it really starts to have a take on a life of its own in terms of growth and we started to see that in many of our markets.
Okay. Another one for Doug Anmuth.
One on podcast content deals as some meaningful podcast content potentially comes up for renewal.
Later this year and through 2024, how is your positioning discipline and thought process different from where you were when you were building out podcasts a few years ago.
Yeah I.
I mean, the most notable one I would say not only are we in a different climate of course, that's the obvious one and thats something ive been addressing.
But I think also to set expectations, where we were four years ago, we had very little data to back up our decisions on so the most important thing is to contextualize. It for investors. We were in a position where we thought podcast overall was under monetized and under utilized by consumers and that we had a real.
Chance of breaking into the marketplace, but we we're kind of nowhere when we entered the field and today. We're number one in most markets around the world. It is proving to be a growing media category and we feel really good about it.
I think overall it was the right that to make and it's played off really nicely and I feel really good about all of the the impact it's having on our engagement and retention and lower churn. So I feel really really good about that part now that said now we also have a lot more data we have a lot more data across the millions of podcast, we already have them.
What that does to new user acquisition to retention two conversions as subscribers et cetera.
And not surprisingly what were finding is that some of these shows worked really well with our audience. Some of them don't work well some of them work well, but during a different cost structure. So we probably overpaid relative to what we should've done.
And so we're we're we're coming at this with the process of right sizing some deals doubling down on some of the things that worked really nicely and then stepping out of some deals and relationships that hasn't worked out.
But I think this is very very normal given that we kind of went in.
In order to get them to really win the space and to gather as much data as we could in a short period of time and so the data. We have now is very rich and allows us to make much better decisions.
We obviously could four years ago.
Alright, we have got a question from Richard Kramer.
Waiting to gross margin what led to the favorability of other cost of revenues in the quarter and how might that develop given the introduction of more video on the platform.
Yes, so there's really two things on that one is sort of our streaming delivery and keep your costs and the other was on customer service streaming delivery being the bigger one.
I think a lot of that is honestly the maturation of the business and our ability to really.
Think through and forecast some of the compute costs and streaming delivery costs for us and so we've gotten better at it.
And that has really helped us.
If you remember last year after a period of time, where they were going down we saw a couple of quarters, where they rose.
Now back in a position where that as a percentage of revenue. They are declining again, we do feel like we have a better handle.
As a business on sort of forecasting and managing those costs going forward. There can always be variations there always might be some fluctuations and with respect to video.
If it were to become a big enough portion that's something we'd have to manage through as well, but again, we have the we have the models now to.
Properly forecasted so we feel like we're in a pretty good place with kind of maintaining the levels. We're at on some of those other cost of revenue lines.
Okay. Another one from Doug about pricing power, how do you think about pricing power over the long term and Spotify is ability to innovate on product to continuously make it more valuable to users.
Yeah, Doug.
The the way we think about it is we're constantly thinking about how we can increase the value that we give our consumers on the platform no matter. If they are on their AD supported here or are paid subscription tier.
And and it really kind of increasing that sort of value to price ratio that we have so I think so long as we're able to bring more value to our consumers than we should have the ability to raise pricing over time as well too to sort of narrow that gap, but we're always going to be focused on over delivering on value.
Towards our consumers on this platform and then when you think about the innovation I feel really good about that as I mentioned in my opening remarks, despite the efficiencies there.
In the last quarter as you can see in our shareholder deck, we've introduced an entirely new redesign of our desktop clients last quarter, we did one on the mobile clients.
We have updated Tesla this quarter, we've updated many of our partner experiences we have.
Introduced a I D J.
Two a wide number of consumers.
And the list goes on and on and on of all of these improvements and.
Again podcasting is still growing very nicely still relatively early audio books is even more nascent in this business and I believe long term going to be very very big for Spotify. Similarly to how are you.
Investors may not have necessarily understood podcasting early on I think audio books will be the next one where where we will look back in a few years to say wow that became quite meaningful quite fast for Spotify. So I feel really good about us being able to add lots of value to consumers over time.
And if we're doing that.
I believe that we have the ability to then raised prices.
To keep the value to price ratio at an appropriate.
Level.
Okay. Our next question is going to come from Zach Morrissey on advertising.
Music AD revenues decelerated to mid single digits in terms of year on year growth in the second quarter. How did this performed relative to your expectations and can you discuss the trends you saw through the quarter and into July .
Yes, so at a very high level revenue was right in line with our expectations.
Obviously, you're doing with them.
Heavier curran.
Currency than we expected, but if you look at both the advertising side and the premiums that we're almost spot on on both of those with respect to our for our own internal forecast. So revenue was right in line with expectation.
Not really guide to music podcast advertising, specifically, but I would say music was pretty much inline podcast was in line to slightly better.
And so we saw good trends in advertising overall, so I would say.
Again to recap revenue right in line not much of a difference.
Outside of our premium side with our expectations.
Alright, we have got a question from Mike Morris.
What are the factors driving third quarter premium subscriber growth the outlook that is below.
The prior year's level of net adds are their promotions or other activities that are driving increased quarterly variability and how much is the announced price increase expected to impact net ads.
So I'd, probably take a step back first and just look at sort of the subscriber growth in general.
We outperformed in Q1 of this year, we outperformed in Q2 of them.
This year, if you look at subscriber growth over the last 12 months, we've added over 30 million net subscribers, which is sort of a phenomenal and accelerating trajectory over any 12 month period of time. The subscriber growth has been really really strong obviously user growth would have been even better I think we've added something like 118 million users over the last 12.
Months as well so both of them have really really been strong.
And when you look at it over a nine month period, incorporating our guidance. We expect net additions in the first nine months of this year to be up 30% relative to the net additions we had in the first nine months of last year. So that's just sort of at the levels that and with respect to the App the absolute guide up in.
In Q3 with one.
We did significantly outperforming Q2, so there's always a question of how much if any we pull forward from Q3 into Q2, given it was our strongest Q2 ever from a subscriber perspective.
The second thing is as I mentioned in my comments, there is definitely some conservatism baked in.
Done price increases in the past we've never done them. This extensive and in some of our very key markets and so there is some conservatism baked in there. So in general I think we feel great about the overall subscriber trends over the last 12 months over the last nine months throughout this year and into Q3.
And again when you look at some of the comments I made into the start of the year with respect to both user growth and subscriber growth we're on pace to exceed.
The comments I made in terms of similar growth to the prior year. So feel really good about the trends on both sides.
Alright, we've got time for a few more questions. We're going to go now to Benjamin Black on marketplace, how is marketplace growth trended and could new products like AI DJ support incremental growth here.
So marketplace has grown really nicely, we haven't updated the numbers in a little while.
I think the last time you updated numbers in.
In 2021, it was about $160 million or so of gross profit contribution I think we said it grew north of 30% last year and we grow significantly again. This year. So marketplace has continued to grow and be a significant driver.
New Prime we're always launching new products, we're always watching.
Different things that we think will benefit us.
Our partners the artists.
As well as as well as the consumer so we will continue to innovate and we think marketplace. Those are all nice trajectory of being additive to us from a financial standpoint, but also more importantly to the artist community and the benefits they receive from me participant.
Okay. We've got a question from Jed Kelly on monthly active users can you quantify how much they use benefited from the decision to delay price increases versus competitors and will that benefit dissipate now.
Yeah, I think you're referring to our subscribers growth in monthly active users because on the free side.
I would say we see.
I don't think we have any impact.
Impact on the price increases.
On that.
But but if you think about the the subscriber growth.
Again.
It may have impacted that may not have impacted but again, if we go back and look at the data based on the about 50 price increases we've seen so far.
With that data in mind I would say it has had very little impact on any.
Future growth.
Or or anything in terms of churn or conversion rates. So.
That's part of the reason why we feel really good about the position we're in and why we feel this is the right time.
To do this so my expectation is while we can't know of course is that we don't believe it's meaningfully impacted.
Okay next question from rich Greenfield on advertising AD supported and they use are growing at over twice the growth rate in your advertising revenues. The AD market is clearly soft but is there anything else in terms of AD product or advertiser willingness to embrace the audio that is dampening your advertising revenue.
Growth.
I think rich.
Part of the explanation.
It's really around that.
Two factors, where we're seeing that growth and then I would say a little bit about just the delay in timing so.
Some of the growth we're seeing in markets that that generally don't have the same strength of <unk>.
Advertising is say United States House. So so when you think about the rest of the world obviously, the rps on the outside that are going to be much lower there than they are in the U S.
So that's some of the explanation when you think about.
<unk> is growing.
But then the other part is and I think you can see this as we're looking at all platforms, but pretty much all social media platforms, followed this similar trend, which is when when you have a reacceleration of growth are very fast rapid growth.
Usually takes a few quarters before the AD market catches up.
So.
It is not sort of one to one when you say a user you can instantly start monetizing that user usually it takes a few quarters before you can do that and and I think you can see that very clearly when you.
Go back and look at.
Some of the other.
Players in the space as well and I think over time, it will start catching up here too, but it's more of a lag than anything else.
And then of course, the developing markets.
Alright, we're going to take our last question today from Benjamin Black on Podcasting podcast advertising re accelerated nicely. This quarter, what was the source of the turnaround and more broadly how would you characterize the advertising environment.
In all areas of kind of our ability to delever.
On the podcasting side.
Better sell out rates.
In general so that's really it wasn't a podcast things on it is as I said earlier.
The advertising podcast advertising did get better throughout the quarter.
So in terms of year over year growth rates. The best month was the last month of the quarter for us from a podcast in your perspective.
Alright, Thanks, Ben and Thats going to wrap up our Q&A session today, let's turn the call back over to Daniel for some closing remarks.
Alright, Thanks, Brian .
It was really a great and historic quarter for Spotify, and I'm energized by our growth and continued outperformance the price increases we announced yesterday to demonstrate the value we provide to our customers and the strength of our offering as a team. We're also moving faster than ever and we're better positioned to deliver on our potential ambitions, we laid out for you.
The last year's Investor Day, we are making tremendous progress towards those goals and I feel confident about our momentum heading into the second half of 2023. So thank you all for joining us and as usual feel free to check out our for the record podcast, which will be released later today.
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 replace thanks, everyone for joining.
This concludes today's call. Thank you for your participation you may now disconnect.
Hi, I'm Kim Kardashian, you might have seen that recently have gotten really involved in wrongful conviction and rehabilitation work and there's one case in particular that I can't stop thinking about.
30 year old Kevin Keith was arrested at his home impress Ly and he is charged with three counts of murder for allegedly killing three members of the chairman family on February 13th 1994, and the gunman Inter Department 17, 12, B W. Cyrus to Steve's complex he killed three people and severely wounded three others Dominion.
Victims, where children are described as one of the worst murder cases in <unk> history. Two days later, Kevin Keith was arrested and charged with a crime.
Kevin Keith was never a question by law enforcement.
Ever.
Finally kind of Australia is pleased to have another question me at all about this what do you think about it.
Brian could you do with <unk>.
Tonnes unless kids, so I would never do that some of what is key is there's so much to explore here and its Michael to take you with me on this task.
Want you to make your own determination, but I think you'll be surprised by what you hear on therefore, frankly, Kevin kills more people than sort of revenge on all my sister.
Alibi witnesses they had no physical evidence whatsoever and he was given the desktop lineup is just not fair. This was a biased test.
Io is 043 license plate in this area and matches the cream colored vehicle.
They have another setback going through those documents. It was like okay. We just found something huge and I know now I'm going to win this case, Kevin Keyes case should concern anyone who is concerned about the integrity.