Q3 2023 Spotify Technology SA Earnings Call

She Friended me on Facebook, a while back and I happily accepted.

Back then Facebook was still pretty new and a fun place for sharing picks of kids with people you hadn't seen in 10 years instead of the minefield of ads sales politics, misinformation and anxiety driven by bizarre algorithms that it is today, so getting friend requests from past acquaintances wasn't out of the ordinary the good old days.

Speaker 1: A few weeks prior, Becky had reached out via messenger and told me she'd be in Seattle for a work trip. She'd asked if I'd like to get wine during her visit. An in-real life visit from a human woman, a night out away from my kids, truly she had me at wine. I said yes without much thought, and here we are on the precipice of our first official live conversation.

Yes.

A few weeks prior Becky had reached out via messenger and told me she'd be in Seattle for a work trip she'd asked if I'd like to get wind during our visits.

And in real life visits from a human woman a night out away from my kids truly she had me it wine.

I said, yes without much thought and here we are on the precipice of our first official live conversation.

Speaker 1: I grab my coat, load the map on my phone, and head off.

I grabbed my coat load the map on my phone and head off.

Speaker 1: It's been a while since I've been out alone without my husband or any of the kids.

It's been awhile since I've been out alone without my husband or any of the kids truth be told the past year has been pretty rocky between my husband and me.

Speaker 1: Truth be told, the past year has been pretty rocky between my husband and me. Adding a fifth kid to the mix has been a challenge, as has his travel schedule. On top of that, finances have been tough and juggling all the things has been overwhelming.

Adding a fifth kid to the mix has been a challenge.

As has as travel schedule.

On top of that finances have been tough and juggling all of the things have been overwhelming pre.

Speaker 1: preschool, piano lessons, soccer practice, driving everywhere, and packing all the lunches between naps and diaper changes.

Preschool piano lessons soccer practice, driving everywhere and packing all the lunches between naps in diaper changes made.

Speaker 1: Maybe that's why I jumped at the chance to meet with someone I hardly know and her cally.

Maybe that's why I jumped at the chance to meet with someone I hardly know and her colleagues.

Speaker 1: Funny how constantly being surrounded by six other people can still leave you feeling so damn lonely sometimes.

It's funny, how constantly being surrounded by six other people can still leave you feeling so damn lonely sometimes.

Speaker 1: In many ways, feeling isolated and alone is what drives many women and moms to find coping mechanisms, little escapes from reality. Though they are innocent from the outset, who doesn't love a mom's night out with wine or to shop at home with Kelsey, they never address the actual problem that women don't have a village. We are alone. Even if we are married or partnered, even if we have friends, the day-to-day tasks fall completely on our shoulders.

In many ways feeling isolated and alone is what drives many women and moms to find coping mechanisms little escapes from reality.

Though they are innocent from the outset, who doesn't love of Moms night out with wine or to shop at home with Kelsey. They never address the actual problem that women don't have a village we are alone.

Even if we are married or partnered even if we have friends the day to day tasks fell completely on our shoulders.

Speaker 2: Since the birth of my first son, I've been wondering where that idyllic village people keep talking about is, or if it even exists. This is a book about cryptocur...

Since the birth of my first son, I have been wondering where that idyllic village people keep talking about is or if it even exists.

This is a book about crypto currency and fraud apparel of money and Lorne.

Speaker 3: Good morning and welcome to Spotify's third quarter twenty twenty three earnings call and webcast.

Good morning, and welcome to Spotify, <unk> third quarter 2023 earnings call and webcast.

Speaker 3: All participants are in a listen-only mode. If you require operator assistance at any time, please press star zero. As a reminder, this conference call is...

All participants are in a listen only mode.

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

As a reminder, this conference call is being recorded.

Speaker 3: I would now like to turn the call over to Brian Goldberg, head of investor relations. Thank you. Please go ahead.

I would now like to turn the call over to Bryan Goldberg head of Investor Relations. Thank you. Please go ahead.

Speaker 4: Thanks operator and welcome to Spotify's third quarter, 2023 earnings conference call. Joining us today will be Daniel Eck, our CEO and Paul Vogel, our CFO .

Thanks, operator, and welcome to Spotify as third 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.

Speaker 4: We'll start with opening comments from Daniel and Paul and afterwards we'll be happy to answer your questions.

Speaker 4: Questions can be submitted by going to slido.com, slido.com and using the code, hashtag, Spotify, earnings, Q323.

The earnings Q3, '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 slide <unk>, 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.

Speaker 4: Analysts can ask questions directly into Slido and all participants can then vote on the questions they find the most relevant. For some reason you don't have access to Slido, you can email investor relations at iratspotify.com and we'll add in your questions.

Speaker 4: 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.

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 Exchange Commission. During this call. We'll also refer to certain non <unk> financial measures rec.

Speaker 4: actual results can materially differ because the factors discussed on today's call in our shareholder deck and in filings with the Securities and Exchange Commission. During this call, we'll also refer to certain non-IFRS financial measures. Reconciliation between our IFRS and non-IFRS 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'll turn it over to Daniel.

Conciliations between R. I F. R. S. A non I O for us 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'll turn it over to Daniel.

Speaker 5: All right, hey everyone and thank you so much for joining us. I hope you've had the opportunity to review our shareholder deck. Bottom line, it's a really exciting time at Spotify and I'm super pleased at how the business is performing. It was a truly stellar quarter and won the clearly illustrates that we're making great progress against the goals that we laid out for you at our 2022 investor day.

Alright, hey, everyone and thank you so much for joining us I hope you've had the opportunity to review our shareholder deck bottom line. It's a really exciting time at Spotify and I'm Super pleased at how the business is performing it was a truly stellar quarter and one that clearly illustrates that we're making great progress against.

The goals that we laid out for you at our 2022 Investor day.

Speaker 5: Q3 was our second largest quarter ever for MEUNF edition, and as we look ahead to the end of the year, you'll also see that we're forecasting to hit another big milestone, reaching more than 600 million monthly active users at the end of the year. And this puts us well on our way to reaching more than 1 billion global users by 2030. And to put that number into context,

Q3 was our second largest quarter ever for Miu enough position and as we look ahead to the end of the year. You'll also see that we're forecasting to hit another big milestone, reaching more than 600 million monthly active users at the end of the year and this puts us well on our way to reaching more than 1 billion global <unk>.

Users by 2030 and to put that number into context 15 years ago. This month Spotify went live in France, Finland, Norway, Spain, Sweden, and the U K, it's been a wild ride.

Speaker 5: 15 years ago this month Spotify went live in France, Finland, Norway, Spain, Sweden, and the UK. It's been a wild ride.

Speaker 5: Next, let's turn to the strength of our subscriber growth. We walked into 2023 thinking we would do just over 20 million in net subscriber ads for the full year, but we're actually on track to deliver 30 million, which is a significant beat from where we thought we would be. In fact, this will be the second biggest full year gain in net subs editions since going public.

Next let's turn to the strength of our subscriber growth we walked into 2023 thinking we would do just over 20 million in net subscriber adds for the full year, but we're actually on track to deliver $30 million, which is a significant beat from where we thought we would be in fact this will be the second biggest full year.

Gain in net subs additions since going public.

Speaker 5: This momentum is especially significant when you put it in the context of the price increases that went into effect in Q3. And as we previously shared, because of our confidence in our product and our ever-expanding content offering, we felt the timing was right to raise prices across more than 50 markets. I know some of you wondered how we'd weather these increases, so I'm really pleased to report that this went as well as we'd hope even modestly exceeding our expectations.

This momentum is especially significant when you put it in the context of the price increases that went into effect in Q3 and.

And as we previously shared because of our confidence in our product and our ever expanding content offering we felt the timing was right to raise prices across more than 50 markets. I know some of you wonder how we'd rather these increases so I'm really pleased to report that this web as well as we'd hope even modestly exceeding our expectations.

Speaker 5: All of this sustained growth is a testament to the exceptional value Spotify continues to deliver globally. And with our new focus on operational efficiencies, we managed to achieve this with reduced marketing costs.

All of this sustained growth is a testament to the exceptional value Spotify continues to deliver globally and with our new focus on operational efficiencies, we managed to achieve this with reduced marketing costs.

Speaker 5: The essence of our business model is to deliver on parallel value to our user base to an ever-improving consumer and creator experience. This is coupled with every now and then expanding our ecosystem through new verticals to deliver even more value. And this of course, nice these segways into the groundbreaking audiobooks offering for premium subscribers that we now have a few weeks ago.

The essence of our business model is to deliver unparalleled value to our user base through an ever improving consumer and greater experience. This is coupled with every now and then expanding our ecosystem through new verticals to deliver even more value and this of course nicey segways into the groundbreaking audiobooks offering for premium subscribers that we know.

Now a few weeks ago.

Speaker 5: So not only will our expansion into this category super-sharge the growth of the audiobooks format, but it also will drive engagement and reduce churn with further enhances our value proposition. And this, of course, gives us more flexibility for our business.

So not only will our expansion into this category supercharge the growth of the audiobooks formats, but it also will drive engagement and reduce churn with further enhances our value proposition and this of course gives us more flexibility for our business.

Speaker 5: And while it's still too early to see the impact in our numbers, initial signs from subscribers in the UK and Australia are incredibly positive as we bring them more content to discover. In the first two weeks since launch, premium subs in these two markets are loving the breadth of titles and have already listened to over 28% of the catalog. They're flocking to fiction, memoirs, sci-fi, and fantasy. And I can't wait to see what US subscribers gravitate towards when we launch their soon.

And while it's still too early to see the impact in our numbers initial signs from subscribers in the UK and Australia are incredibly positive as we bring them more content the discovery in.

In the first two weeks since launch premium subs in these two markets are loving the breath of titles and have already listened to over 28% of the catalog, they're flocking to fiction memoirs, SIFI and fantasy and I can't wait to see what U S subscribers gravitate towards when we launched there soon.

Speaker 5: in terms of how all of this flows down to the underlying fundamentals of the business including of course revenue and gross margin i'll turn it over to paul to provide more detail and then Brian will open up for q and a

In terms of how all of this flows down to the underlying fundamentals of the business, including of course revenue and gross margin I'll turn it over to Paul to provide more detail and then Brian will open it up for Q&A.

Speaker 6: 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.

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.

Speaker 6: Q3 was a very strong quarter. MAU grew by 23 million to 574 million, and we added 6 million net subscribers, finishing at 226 million. Both MAU and subscriber growth continue to be well above our historical trend and outperformed forecast.

Q3 was a very strong quarter EMEA grew by 23 million to $574 million and we added 6 million net subscribers, finishing at $226 million, both MCU and subscriber growth continues to be well above our historical trend and outperformed forecast.

Speaker 6: On the revenue front, we grew 11% year-on-year to $3.4 billion during the quarter. Importantly, our FX neutral growth was 17% and accelerated 300 basis points versus the prior quarter's result, reflecting the early effects of the new pricing and accelerated advertising results.

On the revenue front, we grew 11% year on year to $3 4 billion during the quarter importantly, our FX neutral growth was 17% and accelerated 300 basis points versus the prior quarter's result, reflecting the early effects of the new pricing and accelerated advertising results.

Speaker 6: Training to gross margin, gross margin of 26.4% was above guidance by 40 basis points due primarily to favorability in our music business.

Turning to gross margin gross margin of 26, 4% was above guidance by 40 basis points due primarily to favorability in our music business.

Speaker 6: Moving to operating expenses, growth in the quarter was lower than forecast due mainly to lower than expected personnel and related costs as well as marketing spend.

Moving to operating expenses growth in the quarter was lower than forecast due mainly to lower than expected personnel and related costs as well as marketing spend.

Speaker 6: When combined with our better gross profit, we achieved an operating profit of $32 million in the quarter. We believe this is an important inflection point for the business as we start to see the benefits of our focus on speed and efficiency and progress towards delivering on the profitability targets we laid out to you at our Investor Day last summer.

When combined with a better gross profit we achieved an operating profit of 32 million in the quarter. We believe this is an important inflection point for the business as we start to see the benefits of our focus on speed and efficiency and progress towards delivering on our profitability targets.

We laid out to you at our Investor Day last summer.

Speaker 6: Finally, free cash flow was positive $216 million in Q3.

Finally free cash flow was positive $216 million in Q3.

Speaker 6: Looking ahead to fourth quarter, we are forecasting 601 million MAU, an increase of 27 million from Q3, and 235 million subscribers, an increase of 9 million over Q3.

Looking ahead, the fourth quarter, we are forecasting 601 million Mou, an increase of $27 million from Q3, and 235 million subscribers, an increase of 9 million over Q3.

Speaker 6: This has us adding about 112 million MAU for all of 2023, which is nearly 60% above our four-year historical trends, and adding 30 million subscribers for the year, which is 12% above the historical trends.

This has us adding about 112 million Mou for all of 2023, which is nearly 60% above our four year historical trend, adding 30 million subscribers for the year, which is 12% above historical trends 2023 should finish with the highest net addition for M. A use in the second largest for script for subscribers in company history, but.

Speaker 6: 2023 should finish with the highest net additions for MAUs and the second largest for subscribers in company history, but actually the largest if you exclude the impact of Russia.

The largest if you exclude the impact of Russia.

Speaker 6: We are also forecasting $3.7 billion in total revenue, a gross margin of 26.6%, and an operating profit of approximately $37 million.

We're also forecasting $3 7 billion in total revenue our gross margin of 26, 6% and an operating profit of approximately $37 million.

Speaker 6: Turning to revenue, we are forecasting a 300 basis point headwind to growth given the strengthening of the euro relative to the dollar.

Turning to revenue we are forecasting a 300 basis point headwind to growth given the strengthening of the euro relative to the dollar.

Speaker 6: Excluding this effect, our constant currency revenue would be close to the 3.8 billion Reflecting our expectation for accelerating currency neutral growth to 20% year-on-year versus 17% growth we delivered in Q3 This acceleration is aided by a full quarter benefit of the price increases we announced in Q3

Excluding this effect our constant currency revenue would be closer to $3 8 billion, reflecting our expectation for accelerating currency neutral growth to 20% year on year versus 17% growth. We delivered in Q3. This acceleration is aided by a full quarter benefit of the price increases we announced in Q3.

Speaker 6: In some, we are very pleased with how we're tracking into year end. While it's too early to give guidance from 2024, I do want to point out that we are confident in our path and expect another year of meaningful progress towards delivering on our profitability goals for the business. And with that, I'll hand things over to...

In sum we are very pleased with how we're tracking into year end, while it's too early to give guidance on 2024 I do want to point out that we are confident in our path and expect another year of meaningful progress towards delivering on our profitability goals for the business and with that I'll hand things over to Brian for Q&A. Thanks.

Speaker 4: Thanks, Paul. Again, if you've got questions, please go to slido.com, hashtag SpotifyEarningsQ323. We're going to be reading the questions in the order they appear in the queue with respect to how people vote up their preference for questions.

Thanks, Paul again, if you've got questions. Please go to slide O Dot Com hashtag Spotify earnings Q3, 'twenty three we're gonna be reading the questions in the order they appear in the queue with respect to help people vote up their preference for questions.

Speaker 4: And our first question today is going to come from Matt Thornton on efficiency. Daniel and Paul, you've been successful in ringing out cost efficiencies across marketing personnel and podcasts. Do you feel the business is at steady state now on the cost side, or do you see more opportunity?

And our first question today is going to come from Matt Thornton on efficiency, Daniel and Paul you've been successful in bringing out cost efficiencies across marketing personnel and podcasts you feel the business is at steady state now on the cost side or do you see more opportunity.

Speaker 5: Yeah, I'll start and maybe Paul can fill in. Yeah, we feel, you know, as we walked into the year, just to level set and remind everyone, we talked about having a great product but also needing to become a great business and to prove that out to investors.

Yeah, I'll start and maybe Paul can fill in yeah. We feel you know as we walked into the year just to level set and remind everyone. We talked about having a great product, but also needing to become a great business and to prove that out to investors.

Speaker 5: That's been very much the focus for Paul and myself and the rest of the management team throughout this year. And I think you're really starting to see this nicely being proved out with the delivery of this quarter's results.

That's been very much the focus for our polymer myself and the rest of the management team throughout this year and I think you're really starting to see this nicely beat.

Being proved out with the delivery of this quarter's results but.

Speaker 5: But it really is two parts here. One is the thing that I said in my opening remarks, which is we're focused, as always, on providing great consumer experience and creator experience. And that is what allows that top-line growth to then translate into that business side. But a new part of the Spotify modus operandi is our focus on efficiency.

It really has two parts here one is the thing that I said in my opening remarks, it which is we're focused as always on providing great consumer experience and greater experience and that is what allows that top line growth of them translate into that business side, but the new part of the Spotify of modus operandi is our focus on efficiencies.

Speaker 5: And we're starting to see some leverage here coming into play. But this is the state going forward. Paul, myself and the rest of the management, you know, is constantly looking at how we can make improvements. And we're constantly finding new ways to bring more efficiencies out of the business. So I'm pleased with the progress so far. We've seen some improvements, but you should expect us to continue to look for more improvements going forward because that's just our notice up around.

And we're starting to see some leverage here coming into play but this is the these states going forward, Paul and myself and the rest of the management team. That's constantly looking at how we can make improvements and we're constantly finding new ways to bring more efficiencies out of the business. So.

I'm pleased with the progress so far we've seen some improvement, but you should expect us to continue to look for more improvements going forward because that's just our modus operandi.

Speaker 6: Yeah, and I would just add, we're obviously very pleased to see some of the initial success with an operating profit in Q3 and guidance for operating profit in Q4 as well. And our expectations are now that we will consistently be in the black moving forward. Obviously, you never know what can happen in any one quarter, but we feel good that we're on a different trajectory and we've hit an inflection point with respect to profitability of the business.

Yeah, and I would just add.

We're obviously very pleased to see some of the initial success with an operating profit in Q3 and and guidance for operating profit in Q4 as well and are expect expectations are now that we will consistently be in the black moving forward. Obviously, you never know what can happen in any one quarter, but we feel good that we're on a on a different trajectory and we've hit an inflection point with respect to.

The profitability of the business.

Speaker 4: Great. Next question is going to come from Justin Patterson, a related question on efficiency. Daniel, you began the year restructuring business units with the goal of greater efficiency and product velocity. As we head towards 2024, where do you see the next areas to be more efficient while driving innovation? And Paul, how should we think about expense, puts and takes of audiobook scaling?

Great next question is going to come from Justin Patterson a related question on efficiency are Daniel you began the year restructuring business units with the goal of greater efficiency and product velocity as we head towards 2024, where do you see the next areas to be more efficient, while driving innovation and Paul.

Unknown Executive: But always very sweet. She friended me on Facebook a while back and I happily accepted. Back then, Facebook was still pretty new and a fun place for sharing picks of kids with people you hadn't seen in 10 years.

How should we think about expense puts and takes of audiobooks scaling.

Yeah.

Speaker 5: As I mentioned in my last response, it's very much a focus, I think, across the base. And maybe just to highlight one example. So as the product and technology teams are working on this focus of efficiency, everyone at the company is tasked at it. Everyone has their own deliverables.

Unknown Executive: Instead of the minefield of ads, sales, politics, misinformation and anxiety driven by bizarre algorithms that it is today. So getting friend requests from past acquaintances wasn't out of the ordinary, the good old days. A few weeks prior, Becky had reached out via message messenger and told me she'd be in Seattle for a work trip. She'd asked if I'd like to get wine during her visit. An in real life visit from a human woman, a night out away from my kids.

As I mentioned in my last response, it's very much a focus I think across the basin, maybe just to highlight one one example.

So as the product and technology teams are working on them.

This focus of efficiency everyone at the Companys tasked at its everyone has their own deliverables. So we constantly end up finding ways, where for instance, we are on the compute side on our infrastructure side finding from engineers that are there are better utilization patterns are doing that and they're able to save it.

Speaker 5: So we constantly end up finding ways where, for instance, we are on the compute side, on our infrastructure side, finding from engineers that there are better utilization patterns doing that, and they're able to save expenses as we're doing that. And that's then improving on the streaming delivery costs.

Unknown Executive: Truly, she had me at wine. I said yes without much thought and here we are on the precipice of our first official live conversation. I grabbed my coat, load the map on my phone and head off. It's been a while since I've been out alone without my husband or any of the kids. Truth be told, the past year has been pretty rocky between my husband and me. Adding a fifth kid to the mix has been a challenge as has his travel schedule.

Spencers as we're doing that and that's been improving on the streaming delivery costs that were ending up having and this is just one example, where it's not that we're looking for top down initiatives as much as we're seeing a lot of bottom up initiatives that are adding up to the numbers.

Speaker 5: that we're ending up having. And this is just one example where it's not that we're looking for top-down initiatives as much as we're seeing a lot of bottom-up initiatives that are adding up to the numbers.

Speaker 5: You saw it also very clearly in our marketing spend, we were able to deliver better top-line numbers, but with less spend, because we're now focused on this efficiency goal. And I think that's the power of the Spotify team and the work that everyone's doing. But that also gives Paul and myself great comfort in that.

You saw it also very clearly in our marketing spend we were able to deliver better top line numbers, but with less spend.

Unknown Executive: On top of that, finances have been tough and juggling all the things have been overwhelming. Pre-school, piano lessons, soccer practice, driving everywhere and packing all the lunches between naps and diaper changes. Maybe that's why I jumped at the chance to meet with someone I hardly know and her colleagues. It's funny how constantly being surrounded by six other people can still leave you feeling so damn lonely sometimes. In many ways, feeling isolated and alone is what drives many women and moms to find coping mechanisms, little escapes from reality.

Because we're now focused on this efficiency goal and I think that's the power of the Spotify team and the work that everyone's doing but that also gives Paul and myself great comfort in that there is great opportunities.

Speaker 5: There's great opportunities out there as long as we get the teams focused on it.

Out there as long as we get the teams focused on it.

Speaker 6: Yeah, and then with respect to kind of the audio book side of the question, let me take a step back for a second. If you look at 2023, we said from the start of the year that we expected to see gross margins sequentially improve every quarter of 2023.

Yeah, and then with respect to kind of.

The audio books. Another question, let me take a step back for a second.

If you look at 2023, we said from the start of the year that we expected to see gross margins sequentially improve every quarter of 2023.

Unknown Executive: Though they are innocent from the outset, who doesn't love a mom's night out with wine or to shop at home with Kelsey, they never address the actual problem that women don't have a village. We are alone. Even if we are married or partnered, even if we have friends, the day-to-day tasks fell completely on our shoulders. Since the birth of my first son, I've been wondering where that idyllic village people keep talking about is or if it even exists.

Speaker 6: You know, obviously, we have the benefit of knowing what we're planning to do throughout the year. And so we knew all the initiatives were going to come in play, both the price increases and the launch of audio books. And so all of that played into the commentary we had that we would see that sequential growth. And we're glad that that's what we actually were able to realize and expected to realize in 2023.

Obviously, we have the benefit of knowing what we're planning to do throughout the year and so we knew all the initiatives, we're going to the to come and play about the price increases and the launch of audio books and so all of that played into the commentary you had that we would see that the sequential growth in <unk> and we're glad that that's what we actually were able to realize and expected to realize in 2012.

Three as you look into 2024.

Speaker 6: As you look into 2024, we expect to see a continued improvement in our gross margin trends and a continued improvement in our operating income trends as well. Obviously, there's some investment when it comes to the audiobooks business.

We expect to see a continued improvement in our gross margin trends and continued improvement in our operating income trends as well obviously there is some investment when it comes to the audio books business, but theres nothing about the launch that will derail our progress on the gross margin side or our progress on the operating income side are probably just as important our progress on the free cash flow side.

Unknown Executive: This is a book about cryptocurrency and fraud, a parable of money and line.

Speaker 6: But there's nothing about the launch that will derail our progress on the gross margin side or our progress on the operating income side.

Operator: Good morning and welcome to Spotify's third quarter 2023 earnings call and webcast. All participants are in a listen-only mode. If you require operator assistance at any time, please press star zero. As a reminder, this conference call is being recorded.

Speaker 6: are probably just as important, our progress on the free cash flow side. So I, you know, hopefully everyone noticed we did 200 million of positive free cash flow in Q3. We feel good about the free cash flow trajectory as well in the business. And so we're very encouraged with kind of how Q2023 is.

Hopefully ever noticed we did $200 million of positive free cash flow in Q3, we feel good about the free cash flow trajectory as well in the business and so we're very encouraged with kind of how Q2 thousand 23 is a is a forecast and I'm very optimistic with respect to you know the early indications of where we think 2010.

Bryan Goldberg: I would now like to turn the call over to Brian Goldberg, head of investor relations. Thank you. Please go ahead. Thanks operator and welcome to Spotify's third quarter 2023 earnings conference call. Joining us today will be Daniel Eck, our CEO and Paul Vogel, our CFO. We'll 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 slido.com, slidio.com and using the code hashtag Spotify earnings Q323.

Speaker 6: is forecast to end, and we're very optimistic with respect to, you know, the early indications of where we think 2024 will be.

Bryan Goldberg: Analysts can ask questions directly into Slido and all participants can then vote on the questions they find the most relevant. If for some reason you don't have access to Slido, you can email investor relations at iratspotify.com and we'll add in your question.

For Ob.

Speaker 4: All right, next question from Rich Greenfield on our subscribers.

Alright next question from rich Greenfield on our subscribers.

Speaker 4: Is this your first ever North American subscriber loss? And is that due to turn from the price hike? And how does this inform future price hikes? And did premium turn subs shift to the free ad supported deer?

Is this your first ever North American subscriber loss and is that due to churn from the price hike and how does this inform future price hikes and did premium churn subs shift to the free AD supported here.

Speaker 6: Yeah, so the first part of question. We actually did not lose subs in North America, so I think what's going on here Is the math is you're?

Yes. So the first part of your question, we actually did not lose subs in North America. So I think what's going on here is the math is you're coming.

Speaker 6: Coming up with a number that's based on three rounded numbers, right? So you've got a prior quarter number a current quarter number that are both rounded as well as a percentage number that's rounded So we actually grew subscribers in North America in line with expectations actually all of our Regions performed well from a subscriber perspective and relative to expectations. It was pretty broad based across the board

Coming up with a number that's based on three rounded numbers right. So you've got a prior quarter number of current quarter number that are both rounded as well as a percentage number that's rounded. So we actually grew subscribers in North America in line with expectations actually all of our regions performed well from a subscriber perspective and relative to expectations. It was pretty broad based across the <unk>.

Unknown Executive: 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 can materially differ because the factors discussed on today's call in our shareholder deck and in filings with the Securities and Exchange Commission. During this call, we'll also refer to certain non-IFRS financial measures. Reconciliation between our IFRS and non-IFRS 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.

Speaker 6: So we did not lose any subscribers in North America was actually a good quarter there And so I think it's just rounding and if that's unclear, you know for anyone Please reach out to the IR team after and we can kind of walk through you know, how that works

Ward.

So we did not lose any subscribers in North America was actually a good quarter, there and so I think it's just rounding and if that's unclear.

For anyone please reach out to the IR team after and we can kind of walk through how that works.

Speaker 6: And then with respect to the price increase.

And then with respect to the price increase.

Speaker 6: As Daniel mentioned in his opening, we feel really good about how that went down. We have, you know, when you think about a price increase.

As Daniel mentioned in his opening we feel really good about how that went down.

Daniel Ek: And with that, I'll turn it over to Daniel. All right, hey everyone, and thank you so much for joining us. I hope you've had the opportunity to review our shareholder deck. Bottom line, it's a really exciting time at Spotify and I'm super pleased at how the business is performing.

We have you know when you think about a price increase there's really the two components are always going to be focused on one is anything that elevates churn and then two anything that impacts the gross intake in any way and so it was great was you know the churn was right in line with expectations.

Speaker 6: there's really the two components you're always going to be focused on. One is anything that elevates churn and then to anything that impacts the gross intake in any way. And so it was great was, you know, the churn was right in line with expectations. Um, and we talked about in the past when we've raised prices that, um, you know, churn has never been that material. Um, and it was similar this, this go around. And then I guess even, uh, just as importantly, um, we outperformed on the gross intake side, which is one of the reasons why we outperformed on overall subs.

Daniel Ek: It was a truly stellar quarter and won the clearly illustrates that we're making great progress against the goals that we laid out for you at our 2022 yesterday. Q3 was our second largest quarter ever for MAU in that edition. And as we look ahead to the end of the year, you'll also see that we're forecasting to hit another big milestone, reaching more than 600 million monthly active users at the end of the year.

And we talked about in the past when we've raised prices that churn, it's never been that material and it was similar. This this go round and then I guess, even just as importantly.

We outperformed on the gross intake side, which is one of the reasons why we outperformed on overall subs. So churn from price increases right in line with expectations, and then gross intake even better than expected, which led to the outperformance.

Speaker 6: So, churn from price increases right in line with expectations and then gross and take even better than expected, which led to the outperformance.

Daniel Ek: And this puts as well on our way to reaching more than 1 billion global users by 2030. And to put that number into context, 15 years ago, this month, Spotify went live in France, Finland, Norway, Spain, Sweden, and the UK. It's been a wild ride.

Speaker 4: All right, another question from Justin Patterson on AI. Daniel, Spotify has made a lot of progress with AI through DJ and the AI voice translation pilot. Could you talk about how you view these products affecting listener engagement and creating opportunities for creators? In turn, what type of monetization opportunities does this create for Spotify?

All right another question from Justin Patterson on AI.

Daniel Spotify has made a lot of progress with AI through D. J and the AI voice translation pilot could you talk about how you view these products affecting listener engagement and creating opportunities for creators into.

In turn what type of monetization opportunities. This is create for Spotify.

Daniel Ek: Next, let's turn to the strength of our subscriber growth. We walked into 2023 thinking we would do just over 20 million in that subscriber ads for the full year, but we're actually on track to deliver 30 million, which is a significant beat from where we thought we would be. In fact, this will be the second biggest full year game in net sub-editions since going public. This momentum is especially significant when you put it in the context of the price increases that went into effect in Q3.

Speaker 5: Yeah, I think the primary way we look at AI is that, and certainly through the tools that you're mentioning, it is about increasing engagement with the service by creating even more compelling value.

Yeah.

I think that the primary way, we look at AI is that and certainly through the tools that you're mentioning it is about increasing engagement with the service by creating even more compelling value and the primary way, we think about that is of course.

Speaker 5: And the primary way we think about that is, of course, leveraging AI to create or augment already amazing content. So a great example would be through AI DJ, which mimics some of the behavior on radio that's that companion that provides context around the music you're hearing, and acts as doing an amazing job in providing cultural context.

Leveraging AI to create.

Or augment already amazing content. So great example would be through a I D J, which mimics some of the behavior on radio that's a that companion that provides context around the music you're hearing.

Daniel Ek: And as we previously shared, because of our confidence in our product and our ever-expanding content offering, we felt the timing was right to raise prices across more than 50 markets. I know some of you wondered how we'd weather these increases. So I'm really pleased to report that this went as well as we'd hope even modestly exceeding our expectations. All of this sustained growth is a testament to the exceptional value Spotify continues to deliver globally.

And X is doing an amazing job in providing context cultural context, all of the things that you love radio four but now coming through our personalized D. J for you.

Speaker 5: All of the things that you love radio for, but now coming through a personalized DJ for you.

Speaker 5: I think that's nicely scales what AI can do. It can personalize things, it can contextualize things, it can provide this thing at a scale that would be impossible to do by humans.

I think that's nicely scales, what AI can do it can personalize things Aiken.

Contextualized things it can provide you.

You know this thing at a scale that would be impossible to do by humans and then on the air voice translation apart.

Daniel Ek: And with our new focus on operational efficiencies, we managed to achieve this with reduced marketing costs. The essence of our business model is to deliver on parallel value to our user base through an ever-improving consumer and crater experience.

Speaker 5: And then on the air voice translation part, it is a meaningful one because if you fundamentally think about Spotify, the more content we have on the service, the generally better engagement we start seeing because the more likely it is that we're able to serve up something that consumers love.

It is a meaningful one because if you fundamentally think about Spotify the more content, we have on the service. The generally batterer engagement, we start seeing because the more likely it is that we're able to serve up something that consumers love and so they are voice translation thing is amazing both for creators and consumers and for our consumers, especially.

Daniel Ek: This is coupled with every now and then expanding our ecosystem through new verticals to deliver even more value. And this, of course, nicely segues into the groundbreaking audiobooks offering for premium subscribers that we announced a few weeks ago. So not only will our expansion into this category super-charge the growth of the audiobooks formats, but it also will drive engagement and reduce churn with further enhances our value proposition. And this, of course, gives us more flexibility for our business.

Speaker 5: And so the AI voice translation thing is amazing both for craters and consumers and for consumers, especially in non-English language content, they generally have a lot less content to consume. And for many other craters, this is an ability for them to be able to go with their content through many more geographies that they currently aren't able to penetrate at all.

In non English language content. They they generally have a lot less content to consume.

And for many other craters. This is an ability for them to be able to go with their content through many more geographies that they currently aren't able to penetrate at all.

Speaker 5: And so this is one of those things where you've heard me say this before, but the win-win thing is what we look for at Spotify, something that's great for creators and great for consumers. It's usually great for Spotify and this is exactly that.

And so this is one of those things where you've heard me say this before but the win win thing is while we look for a Spotify something that's great for creators and great for consumers, it's usually great for for Spotify and this is exactly that.

Daniel Ek: And while it's still too early to see the impact in our numbers, initial signs from subscribers in the UK and Australia are incredibly positive as we bring them more content to discover. In the first two weeks since launch, premium subs in these two markets are loving the breadth of titles and have already listened to over 28% of the catalog. They're flocking to fiction, memoirs, sci-fi and fantasy, and I can't wait to see what US subscribers gravitate towards when we launched there soon.

Speaker 5: And then the primary way you should think about these initiatives, it does create greater engagement. And that greater engagement means we reduce shurn. And that, of course, greater engagement also means we produce more value for consumers. And that value to price ratio is what then allows us...

And then the primary way you should think about these initiatives it does create greater engagement and that greater engagement means.

We've reduced churn and that of course greater engagement also means we produce more value for consumers and add value to price ratio is what then allows us to raise prices like we did.

Speaker 5: to race prices like we did this pass quarter with great success.

Paul Vogel: In terms of how all of this flows down to the underlying fundamentals of the business, including, of course, revenue and gross margin, I'll turn it over to Paul to provide more detail, and then Brian will open it up for Q&A.

This this past quarter with great success, and we're constantly focus on improving that ratio all the time by just adding more and more and more value for consumers and I think that's what you can see with our topline growth coming into the year with meus growing very nicely and then you know eventually.

Speaker 5: And we're constantly focused on improving that ratio all the time by just adding more and more and more value for consumers. And I think that's what you can see with our top line growth coming into the year with MEU's growing very nicely. And then eventually, you know, segueing itself into better subscriber growth, which then of course leads to better revenue growth.

Paul Vogel: 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. Q3 is a very strong quarter. MAU grew by 23 million to 574 million and we added 6 million net subscribers finish a 226 million. Both MAU and subscriber growth continued to be well above our historical trend and outperformed forecast. On the revenue front, we grew 11% year-on-year to 3.4 billion during the quarter.

You know segway itself into better subscriber growth, which then of course leads to better revenue growth.

Speaker 5: And so it's kind of this trifecta of things, but it really starts with improving the consumer and creator value proposition, which we're focused on, and AI can be a real enabler there.

And so it's kind of this trifecta of things, but it really starts with improving the consumer and greater value proposition, which were focus on an AI can be a real enabler there.

Paul Vogel: Importantly, our FX neutral growth was 17% and accelerated 300 basis points versus prior quarters result, reflecting the early effects of the new pricing and accelerated advertising results. Turning to gross margin, gross margin of 26.4% was above guidance by 40 basis points due primarily to favorability in our music business. Moving to operating expenses, growth in the quarter was lower than forecast due mainly to lower than expected personnel and related costs as well as marketing spend.

Speaker 4: All right, another question from Matt Thornton on Growth Drivers. What are the key incremental drivers of growth as we look in the 2024? For example, can Mark at place grow faster than the core business? Do you expect audiobooks to move the needle in 2024? Is ticketing and merch at all material yet? What about a full global rollout of a new UI, AI DJ or anything else?

Alright, another question from Matt Thornton on growth drivers what are the key incremental drivers of growth as we look into 2024 for example can marketplace grow faster than the core business do you expect audiobooks to move the needle in 2024.

His ticketing and merch at all material yet.

A full global rollout of a new UI AI D J or anything else.

Speaker 5: maybe I'll start and then Paul can chime in. So I think for 2024, just to set the expectation, it is about delivering on the core. And I think hopefully investors should be able to see now that the core has plenty left to offer when it comes to growth.

Yeah, maybe I'll start and then Paul can chime in so I think for 2024 just to set the expectation. It is about delivering on the core and I think hopefully investors should be able to see now that the core has plenty left to offer when it comes to growth.

Paul Vogel: When combined with our better gross profit, we achieved an operating profit of 32 million in the quarter. We believe this is an important inflection point for the business as we start to see the benefits of our focus on speed and efficiency and progress towards delivering on the profitability targets. We laid out to you at our investor day last summer. Finally, free cash flow was positive 216 million in Q3. Looking ahead the fourth quarter, we are forecasting 601 million MAU in increase of 27 million from Q3 and 235 million subscribers in increase of 9 million over Q3.

Speaker 5: And we feel really good about the growth we've had in 2023. And we can nicely see that segue back into 2024.

And we feel really good about the growth we've had in 2023, and we can nicely see that segue back into 2024.

Speaker 5: And that's of course delivering against all of the things we already have. So our advertising business on one hand, seeing where scale there, which will drive more efficiencies.

And that's of course delivering against all of the things we already have so our advertising business on one hand, seeing where with scale, there, which will drive more efficiencies you mentioned marketplace, we're heading very nicely there too.

Speaker 5: You mentioned Marketplace. We're heading very nicely there too on the business side. And we're offering more and more products to people on the Marketplace side, which is seeing better and better results relative to all the other marketing spend that labels and artists teams.

Paul Vogel: This has us adding about 112 million MAU for all of 2023, which is nearly 60% above our four-year historical trends and adding 30 million subscribers for the year, which is 12% above the historical trends. 2023 should finish with the highest net additions for MAUs and the second largest for subscribers in company history, but actually the largest if you exclude the impact of Russia. We are also forecasting 3.7 billion in total revenue, a gross margin of 26.6% and an operating profit of approximately 37 million.

On the business side.

And we're offering more and more products to people on the marketplace side, which is seeing better and better results relative to all the other marketing spend that that labels and artists teams.

Speaker 5: are encountering, which of course is a great testament for meaning more and more artists will keep on investing with us there.

Our our are encountering which of course is a great Testament for for meaning more and more artists will keep on investing with us there.

Speaker 5: And then on the product side, you're right in pointing out the new UI. It is being fully rolled out. So we're seeing great results with that. AIDJ has been rolled out to many more countries already, but that's the English language one, so you should definitely expect to see local versions of the AIDJ to allow for even more engagement.

And then on the product side Youre.

Youre right in pointing out the new UI it is being fully rolled out our sourcing great results without AI D. J has been rolled out to many more countries already but that's the English language. One. So you should definitely expect to see local versions of the air D. J to allow for even more engagement.

Paul Vogel: Turning to revenue, we are forecasting a 300 basis point headwind to growth given the strengthening of the Euro relative to the dollar. Excluding this effect, our constant currency revenue would be close to the 3.8 billion, reflecting our expectation for accelerating currency neutral growth to 20% year on year versus the 17% growth we delivered in Q3. This acceleration is aided by a full quarter benefit of the price increases we announced in Q3. In some, we are very pleased with how we are tracking into year end.

Speaker 5: But that engagement as I mentioned in my previous response.

But that engagement as I mentioned in my previous response.

Speaker 5: allows for more flexibility for the business. That allows for either more top line growth through a better proposition at a low price, which will mean we'll grow even faster. Or we have the ability of course, if we produce a great value to raise prices again to keep that value and price ratio at a good clip. So there are plenty of opportunities in 2024 for the core business to produce. And that's where you should.

It allows for more flexibility for the business that allows for either more topline growth through a better proposition at a low price, which will mean, we'll grow even faster or we have the ability of course, if we produce a great.

Paul Vogel: While it's too early to give guidance on 2024, I do want to point out that we are confident in our path and expect another year of meaningful progress towards delivering on our profitability goals for the business.

Value to raise.

Raise prices again to keep that value and price ratio are at a good clip so there'd be plenty of opportunities in 2024 for the core business.

Bryan Goldberg: And with that, I'll hand things over to Brian for Q&A. Thanks, Paul. Again, if you've got questions, please go to slido.com hashtag Spotify earnings Q323. We're going to be reading the questions in the order they appear in the queue with respect to how people vote up their preference for questions.

To produce and that's why you should expect.

Speaker 5: We are making great progress on ticketing and merch and all these other fronts too, but they are not yet material drivers, so I don't want any investor to have that expectation. But long term, they will be, and we're excited about them. But for 2024, it's about delivering on the core, which has plenty more to give.

We are making great progress on ticketing emerge in all of these other fronts too, but they are not yet material drivers. So I don't want any investor to have that expectation, but long term they will be and we're excited about them, but for 2024, it's about delivering on the core which has plenty more to give.

Daniel Ek: And our first question today is going to come from Matt Thornton on efficiency. Daniel and Paul, you've been successful in ringing out cost efficiencies across marketing personnel and podcasts. Do you feel the business is at steady state now on the cost side or do you see more opportunity? Yeah, I'll start and maybe Paul can fill in. Yeah, we feel, you know, as we walked into the year just to level set and remind everyone, we talked about having a great product but also needing to become a great business and to prove that out to investments.

Speaker 6: Yeah, and I would just add real quickly to Daniel's point. Obviously, we'll have almost three-fold quarters of the price increase from a growth perspective on the revenue side, impacting 2024. And then, as Daniel mentioned, advertising businesses improved throughout 2023. So we're hoping that advertising could continue to be a driver in 2024 as well.

Yeah, and I would just add real quickly to Daniel's point, obviously, we'll have almost three full quarters of the price increase from a growth perspective on the revenue side.

Impacting 2024, and then as Daniel mentioned.

Advertising business has improved throughout 2023 so.

We're hoping that advertising could continue to be a driver in 2024 as well.

Oh, I forgot to mention by the way on the audio books side, which you asked about as well. So yes, we do think audio books will be held.

Speaker 5: I forgot to mention, by the way, on the audiobooks side, which you asked about as well. So yes, we do think audiobooks will be helpful to the 2024 results as well, but it will be early days, of course. It's still an early product development, early launch. And the primary focus is to bring it out in more months.

Daniel Ek: That's been very much the focus for Paul and myself and the rest of the management team throughout this year. And I think you're really starting to see this nicely being proved out with the delivery of this quarter's results. But it really is two parts here. One is the thing that I said in my opening remarks, which is we're focused as always on providing great consumer experience and crater experience. And that is what allows that top line growth to then translate into that business side.

Helpful to the 'twenty 'twenty four results as well, but it will be early days of course, it's still an early product development.

Early launch.

And the primary focus is to bring it out in more markets.

Speaker 4: Great. Another question from Justin Patterson. This one's on subscription pricing. Spotify is now delivering a lot more value through product innovation and the inclusion of audiobooks. It also seems like churn was minimal from recent price increases. So given these dynamics, how's your approach towards pricing as a lever changing versus what we've observed in the past?

Great. Another question from Justin Patterson this one's on subscription pricing.

Spotify is now delivering a lot more value through product innovation and the inclusion of audiobooks. It also seems like churn was minimal from recent price increases. So given these dynamics how's your approach towards pricing as a lever changing versus what we've observed in the past.

Daniel Ek: But the new part of the Spotify all modus operandi is our focus on efficiencies. And we're starting to see some leverage here coming to play. But this is the state going forward. Paul, myself and the rest of the management is constantly looking at how we can make improvements and we're constantly finding new ways to bring more efficiencies out of the business. So I'm pleased with the progress so far, we've seen some improvements, but you should expect us to continue to look for more improvements going forward because that's just our modus operandi.

Yeah.

Speaker 5: Well, I think that there's two paths to mention. One was before this prior quarter, and one is going forward. And we talked about this when we did race prices that are our...

Well.

I think that there's two paths paths to mention one was before this prior quarter.

And won is going forward and we've talked about this when we did raise prices that R. R.

Speaker 5: We were adding a leg to the stool. So again, to kind of bring everyone back in for context.

We were adding a leg to the stool.

So again to kind of bring everyone back in for context, we had plenty of growth drivers, we can grow in a market by keeping the price relatively low and drove top line that grows the market and grows our revenue.

Speaker 5: We have plenty of growth drivers. We can grow in a market by keeping the price relatively low and grow top line that grows the market and grows our revenue. We can of course, again, increase the engagement even further and have more advertising. That's another way to grow our business. And then we have the third level, lever, of course, which is to grow through price increases. We hadn't up until that point.

Daniel Ek: Yeah, and I would just add, we're obviously very pleased to see some of the initial success with an operating profit in Q3 and guidance for operating profit in Q4 as well. And our expectations are now that we will consistently be in the black moving forward. Obviously, you never know what can happen in any one quarter, but we feel good that we're on a different trajectory and we've hit an inflection point with respect to profitability of the business. Great.

We can of course again and increase the engagement, even further and have more advertising that's another way to grow our business and then we have the third level lever of course, which is to grow through price increases we had in up until that point used the lever of price increases to a great extent.

Speaker 5: used the lever of price increases to a great extent we did. I feel really good about what we learned there. So it's definitely part now of the arsenal of tools we can deploy to keep growing the business and I think you should expect us to use that when we see the appropriate dynamics.

Did.

I feel really good about what we learn there. So it's definitely a part now of the Arsenal of tools, we can deploy to keep growing the business and I think you should expect us to use that when we see the appropriate dynamics, but the primary thing again just to level set with investors why you're seeing the top line growth the way you ours, because we're <unk>.

Justin Patterson: Next question is going to come from Justin Patterson, a related question on efficiency.

Daniel Ek: Daniel, you began the year restructuring business units with the goal of greater efficiency and product velocity. As we head towards 2024, where do you see the next areas to be more efficient while driving innovation? And Paul, how should we think about expense, puts and takes of audiobook scaling? Yeah. As I mentioned in my last response, it's very much a focus, I think across the base and maybe just to highlight one example.

Speaker 5: But the primary thing, again, just the level set with investors, why you're seeing the top-line growth the way you are, is because we're providing an amazing value to consumers. That is the primary thing we are focused on to keep on delivering amazing value. And then when we get to that amazing value, then of course we have more flexibility and we can choose to increase prices.

Providing an amazing value to consumers that is the primary thing we are focused on to keep on delivering amazing value and then when we get to.

That amazing value then of course, we have more flexibility and we can choose to increase prices to.

Daniel Ek: So as the product and technology teams are working on this focus of efficiency, everyone at the company's task that it's everyone has their own deliverables. So we constantly end up finding ways where, for instance, we are on the compute side on our infrastructure side, finding from engineers that there are better utilization patterns doing that. And they're able to save expenses as we're doing that. And that's then improving on the streaming delivery costs that we're ending up having.

Speaker 5: uh... to get that value to price ratio and the right balance we definitely have a lot more opportunities going forward and we feel really confident given what we've learned in this price

To get that value to price ratio and a right balance. So we definitely have a lot more opportunities going forward and we feel really confident given what we've learned in this price increase.

Speaker 4: All right, next question is going to come from Benjamin Black on gross margin. You've guided to sequentially improving gross margins for all of 2023. When we look forward to 2024, given the price increases in improving profitability at podcasts, should a similar gross margin progression hold true? Yes.

Alright next question is going to come from Benjamin Black on gross margin you've guided to sequentially improving gross margins for all of 2023, when we look forward to 2024, given the price increases and improving profitability of podcasts should a similar gross margin progression hold true.

Daniel Ek: And this is just one example where it's not that we're looking for top-down initiatives as much as we're seeing a lot of bottom-up initiatives that are adding up to the numbers. You saw it all the very clearly in our marketing span. We were able to deliver better top-line numbers but with less span because we're now focused on this efficiency goal. And I think that's the power of the Spotify team and the work that everyone's doing. But that also gives Paul and myself great comfort in that there's great opportunities out there as long as we get the teams focused on it.

Yeah, So I'd say a couple of things here one is.

Speaker 6: For first on the podcasting side, yeah, we've seen the improvements in the podcasting business and we talked about how that's been a drag on our gross margins and we expect it to

So first on the podcast side, Yeah, we've seen.

The improvements in the podcasting business and we talked about how that's been a drag on our gross margins and we expect it to.

Speaker 6: to soon reach break-even and then become something that's actually additive to gross profit. So we're on track on the podcasting side there, and that should continue to be helpful into 2024. Same with the music side, in terms of incremental gross margins there as well. When you think about the audiobooks side of it, there's obviously some investment any time you launch a new business.

To soon reach break even and then becomes something its actually additive to gross profit. So we're on track on the podcasts inside there and that should continue to be helpful into 2024.

With the music side in terms of incremental gross margins there as well.

When you think about the audio books side of it there is obviously some investment anytime you launch a new business.

Speaker 6: But again, as I said earlier, we feel really good about continuing to have a nice progression in gross margins into 2024. We'll give more specific guidance on the next earnings call. The only thing is, you know, when you think about sequentials, we do tend to have some seasonality in Q1 versus Q4.

Paul Vogel: Yeah, and then with respect to kind of the audiobook side of the question, let me take a step back for a second. If you look at 2023, we said from the start of the year that we expected to see gross margins sequentially improve every quarter of 2023. You know, obviously we have the benefit of knowing what we're planning to do throughout the year. And so we knew all the issues we're going to come in play but the price increases and the launch of audiobooks.

But again as I said earlier, we feel really good about continuing to have.

A nice progression in gross margins into 2024, we'll give more specific guidance on the next earnings call.

Paul Vogel: And so all that played into the commentary we had that we would see that sequential growth. And we're glad that we actually were able to realize and expect it to realize in 2023. As you look into 2024, we expect to see continued improvement in our gross margin trends and continued improvement in our operating income trends as well. Obviously there's some investment when it comes to the audiobooks business. But there's nothing about the launch that will derail our progress on the gross margin side or our progress on the operating income side.

The only thing is you know when you think about sequential as we do tend to have some seasonality in Q1 versus Q4.

Speaker 6: Some years, it's more material than others. Obviously, advertising, it tends to be one of the slower quarters from an advertising perspective. But we are expecting gross margins to be improved in 2024, and we feel really good about hitting all the targets we talked about yesterday and the significant progress we've already made to date.

Some years, it's more material than others, obviously advertising it tends to be one of the slower quarters from an advertising perspective.

But we are expecting gross margins to be to be improved in 2024, and we feel really good about hitting all the targets, we talked about the investor day and the significant progress we've already made to date.

Speaker 4: Next question is from Doug Enmouth on audiobooks. Can you talk about the cost structure and the economics of audiobooks? How should we think about the impact of gross margin in fourth quarter and into 2024? And what gives you confidence in adoption by subscribers?

Alright next question is from Doug Anmuth on audio books can you talk about the cost structure and the economics of audiobooks, how should we think about the impact to gross margin in fourth quarter and into 2024, and what gives you confidence and adoption by subscribers.

Speaker 6: Yeah, so I guess I'll just kind of read what I said, which is obviously there's always going to be, there's some costs whenever you launch a new product. But you'll see that the gross margins are up Q3 to Q4. And as I've said a couple of times now, we do expect gross margins to be up again in 2024. And we expect to continue to see that nice progress we've made on the gross margin side and the operating profit side into 2024.

Paul Vogel: Or probably just as important our progress on the free cash flow side. So hopefully everyone noticed we did 200 million of positive free cash flow in Q3. We feel good about the free cash flow trajectory as well in the business. And so we're very encouraged with kind of how cute 2023 is forecast end. And we're very optimistic with respect to the early indications of where we think 2024 will be.

Yes, so I guess I'm, just kind of read of what I said.

Which is obviously, there's always going be theres some costs whenever you launch a new product.

But you'll see that the gross margins are up Q3 to Q4 and as I've said a couple of times now we do expect gross margins.

To be up again in 2024, and we expect to continue to see that nice progress. We've made on the gross margin side and the operating profit side into 2024.

Speaker 6: And the confidence on adoption of subscribers, I'll start, maybe Daniel has some thoughts here. But I think as Daniel mentioned, you know, it's early days, but we feel really good about the first, you know, couple of weeks to months in the markets we've launched in.

And their confidence on adoption subscribers I'll start maybe Daniel has some thoughts here, but I think as Daniel mentioned, it's early days, but we feel really good about the first couple of weeks to months in the markets. We've launched in and we just believe it's going to be a great product, it's going to open up more.

Rich Greenfield: All right, next question from Rich Greenfield on our subscribers. Is this your first ever North American subscriber loss? And is that due to churn from the price hike? And how does this inform future price hikes? And did premium churn subs shift to the free ads supported here?

Speaker 6: And, you know, we just believe it's going to be a great product. It's going to open up more authors to more consumers.

More authors to more consumers and what we've seen in the past is when we enter a business the business becomes bigger the podcasting business is a much bigger global business because Spotify is a part of that business now and we think we're going to have the same benefit on the audio book side, which will be great for authors and great for consumers.

Speaker 6: And what we've seen in the past is when we enter a business, the business becomes bigger. The podcasting business is a much bigger global business because Spotify is a part of that business now. And we think we're going to have the same benefit on the audiobook side, which will be great for authors and great for consumers.

Daniel Ek: Yeah, so the first question we actually did not lose subs in North America. So I think what's going on here is the math is you're coming up with a number that's based on three rounded numbers, right? So you've got a prior quarter number, a current quarter number that are both rounded as well as a percentage number that's rounded. So we actually grew subscribers in North America in line with the expectations. Actually all of our regions performed well from a subscriber perspective and relative to expectations. It was pretty broad based across the board. So we did not lose any subscribers in North America. It was actually a good quarter there. And so I think it's just rounding.

Yeah, and and we feel you know.

Speaker 5: You know, great. Again, as I mentioned in my opening remarks with the adoption in UK and Australia, and just as a reminder to investors, we are planning to launch in the US this coming winter as well. So you're definitely going to see us expand audiobooks. And already with this initial launch, it is positive. It's early days.

Great again as I mentioned in my opening remarks, with the adoption and in UK and Australia, and just as a reminder to investors.

We are planning to launch in the U S. This coming winter as well, so you're definitely going of see us expand our audio books and already with this initial launch.

Unknown Executive: And if that's unclear for anyone, please reach out to the IR team after and we can kind of walk through how that works.

It is positive it's early days, but we're encouraged with what we're seeing in the most important thing is when you think about the consumers that are trying out the experience, they're loving it and theyre finding it and it really natural part of the Spotify experience and a great value add and that speaks to this earlier point, we made about sort of consistently improving.

Speaker 5: but we're encouraged with what we're seeing and the most important thing is

Paul Vogel: And then with respect to the price increase, as Daniel mentioned in his opening, we feel really good about how that went down. We have, when you think about a price increase, there's really the two components are always going to be focused on. One is anything that elevates churn and then two, anything that impacts the gross intake in any way. And so it was great was, you know, the churn was right in line with expectations.

Speaker 5: when you think about the consumers that are trying out the experience they're loving it and they're finding it and it really natural part of the spotify experience and a great value add and that speaks to this earlier point we made about sort of consistently improving the experience by adding more things for creators and consumers alike and then every now and then adding these verticals that just step-shin make step changes in the value proposition that would

The experienced by adding more things for creators and consumers alike, and then every now and then.

Paul Vogel: And we talked about in the past when we've raised prices that churn had never been that material. And it was similar to this go around. And then I guess even just as importantly, we outperformed on the gross intake side, which is one of the reasons why we outperformed on overall subs. So churn from price increases, right in line with expectations. And then gross intake even better than expected, which led to the outperformance.

Adding these verticals that just section make step changes in the value proposition that we're doing.

Unknown Executive: All right.

Speaker 4: Okay, next question from Rich Greenfield on marketing efficiency. You accelerated user and revenue growth while cutting marketing spend. Can you help us understand what's enabled this dynamic and whether you believe it's sustainable into 2024?

Okay next question from rich Greenfield on marketing efficiency, you accelerated user and revenue growth, while cutting marketing spend can you help us understand what's enabled this dynamic and whether you believe it's sustainable into 2024.

Speaker 5: Yeah, Rich, I would really make it a testament to this focus on efficiency, as we talked about. You know, again, it is marvelous when the team focuses on something here at Spotify. We tend to achieve it. And when Paul and I kind of set that objective for the teams, what started happening was they started focusing a lot more on the performance marketing mix, some of the initiatives that we were doing. We were pulling back from other things. We were doubling down on others.

Yeah rich.

I would really make it a testament to this focus on efficiency as we talked about you know again it is marvelous when the team focuses on something here at Spotify, we tend to achieve it and when Paul and I can accept that objective for the teams what started happening with are they starting to focusing a lot more on.

Justin Patterson: Another question from Justin Patterson on AI. Daniel, Spotify has made a lot of progress with AI through DJ and the AI voice translation pilot. But you talk about how you view these products affecting listener engagement and creating opportunities for creators.

Daniel Ek: In turn, what type of monetization opportunities does this create for Spotify? Yeah, I think the primary way we look at AI is that, and certainly through the tools that you're mentioning, it is about increasing engagement with the service by creating even more compelling value. And the primary way we think about that is, of course, leveraging AI to create or augment already amazing content. So a great example would be through AI DJ, which mimics some of the behavior on radio that's that companion that provides context around the music you're hearing and acts as doing an amazing job in providing context, cultural context, all of the things that you love radio for, but now coming through a personalized DJ for you.

That performance marketing mix some of the initiatives that we're doing where we're pulling back from other things we were doubling down on others and we started seeing a topline holding up empty even accelerating at a lower marketing expense and we've seen this trend now play out for a few quarters. Initially I was kind of skeptical when.

Speaker 5: And we started seeing top line holding up and even accelerating at a lower marketing expense. And we've seen this trend now play out for a few quarters.

Speaker 5: Initially, I was kind of skeptical whether that would be able to keep going. But with the recent learnings, it seems very possible that is the case.

That would be able to keep going but with the recent learnings that seems very possible that is the case and that we are simply increasing our rate of learning.

Speaker 5: uh... and that we are are simply increasing our rate of learning uh... at a great pace across the marketing team and that i think uh... is a very positive sign going into twenty

At a great pace across the marketing team and that I think is a very positive sign going into 2024.

Yeah.

Speaker 4: All right, another one from Chris Greenfield on advertising. Advertising growth, constant currency accelerated to 24% from low to mid-teens the past couple quarters. What's driving that acceleration and how are you feeling about the time period ability to drive advertising towards 20% of overall revenues compared to 13% today?

Alright, another one from rich Greenfield on advertising advertising growth constant currency accelerated to 24% from low to mid teens at the past couple of quarters, what's driving that acceleration and how are you feeling about the time period ability to drive advertising towards 20% of overall.

Daniel Ek: I think that's nicely scales what AI can do. It can personalize things, it can contextualize things, it can provide this thing at a scale that would be impossible to do by humans. And then on the AI voice translation part, it is a meaningful one because if you fundamentally think about Spotify, the more content we have on the service, the generally better engagement we start seeing because the more likely it is that we're able to serve up something that consumers love.

Revenues compared to 13% today.

Speaker 6: Yeah, so the quarter just saw a nice acceleration both on the music side and the podcasting side on constant currency, so it was across the board.

Yeah. So.

The quarter just saw a nice acceleration both on the music side and on the podcast side on constant currency. So it was across the board.

So we're doing a good job of of selling we're improving the tools are improving on the automation side of the world and.

Daniel Ek: And so the AI voice translation thing is amazing both for creators and consumers. And for consumers, especially in non-English language content, they generally have a lot less content to consume. And for many other creators, this is an ability for them to be able to go with their content through many more geographies that they currently aren't able to penetrate at all. And so this is one of those things where you've heard me say this before, but the win-win thing is what we look for at Spotify, something that's great for creators and great for consumers.

And honestly, where we're doing a good job of southern cross both music and podcasting. So we're having both of them in.

In the ecosystem is really really helpful, which I think we've talked about before in the past and so that's been a lot of the driving growth.

Speaker 6: I don't really have an update to give you in terms of 20%. It's not necessarily a target we shoot for. I think what we've said in the past is we believe over time that if advertising continues to grow, it could become 20% or more. But we feel good about the acceleration on the advertising side in Q3 and the trends, kind of how they've improved throughout the year.

I don't really have an update to give you in terms of 20%.

Not necessarily a target we shoot for I think what we've said in the past is we believe over time that are advertising continues to grow it could become 20% or more.

But we feel good about the acceleration on the advertising side in Q3, and the trends and how they have improved throughout the year.

Okay, Benjamin Black on audio books.

Daniel Ek: It's usually great for Spotify and this is exactly that. And then the primary way you should think about these initiatives, it does create greater engagement. And that greater engagement means we reduce churn. And that, of course, greater engagement also means we produce more value for consumers. And that value to price ratio is what then allows us to raise prices like we did this past quarter with great success. And we're constantly focused on improving that ratio all the time by just adding more and more and more value for consumers.

Audio books monetization is via overage charges, but how do you think about medium term monetization of this offering will there be additional tiers with discrete payments for access and at your Investor Day, you highlighted 40% plus gross margins for audio books, what's the bridge from this offering to hitting those targets.

Speaker 5: Yeah, I'll start a maybe Paul can chime in. So I think first and foremost, it's very early days on the audiobook side, but we're encouraged with what we're

Yeah, I'll I'll start and maybe Paul can chime in.

So.

I think first and foremost it's very early days on the audio book side.

But we're encouraged with what we're seeing.

Speaker 5: So you're right in that this is included in the premium offering. It is one of the benefits obviously that our members are getting and that in turn gives us more flexibility as a business that we talked about. Just as a reminder, however, the offering available for consumers is 15 hours a month. For consumers that hit that base or subscribers that hit that base of 15 hours a month, there is the ability to top up.

Daniel Ek: And I think that's what you can see with our top line growth coming into the year with MEU's growing very nicely. And then eventually, you know, segueing itself into better subscriber growth, which then, of course, leads to better revenue growth. And so it's kind of this trifect of things, but it really starts with improving the consumer and creator value proposition, which we're focused on. And AI can be a real enabler there.

So you're right in that this is included in the premium offering. It is one of the benefits obviously that our members are getting and that in turn gives us more flexibility.

As a business that we talked about.

Just as a reminder, however, the offering available for consumers is 15 hours a month.

For consumers that hit.

That base or subscribers that hit that base of 15 hours a month there is the ability to top up so theres already today, the ability for discrete payments where consumers can.

Speaker 5: So there's already today the ability for discrete payments where consumers can upgrade.

Matt Thornton: Alright, now the question from Matt Thornton on Growth Drivers. What are the key incremental drivers of growth as we look in the 2024? For example, can Marketplace grow faster than the core business? Do you expect audiobooks to move the needle in 2024? Is ticketing and merch at all material yet? What about a full global rollout of a new UI, AI, DJ, or anything else? Yeah, maybe I'll start and then Paul can chime in.

Speaker 5: And we're already seeing consumers doing that in ways we probably wouldn't have imagined, where some consumers are heavily upgrading and being really heavy audiobooks listeners already day one. But obviously, the base is very small.

Upgrade and we're already seeing consumers doing that in in.

In waste, we probably wouldn't have imagine where whereas some consumers are are heavily upgrading and being really heavy audiobooks.

Our listeners already day, one, but obviously the base is very small so it's impossible for us to say where that leads us long term.

Speaker 5: impossible for us to say where that leads us long term, but the ability exists and I think it will be a part of our business, but we also, of course, think that being part of this subscription is what the real value is because it will expand the market of audiobooks.

Daniel Ek: So I think for 2024, just to set the expectation, it is about delivering on the core. And I think, hopefully, investors should be able to see now that the core has plenty left to offer when it comes to growth. And we feel really good about the growth we've had in 2023, and we can nicely see that segue back into 2024. And that's, of course, delivering against all of the things we already have.

But the ability exists.

And I think it'll be a part of our business, but we also of course think that being part of the subscription is what the real value is because it will expand the market of audiobooks and we think consumers. It's a form of the consumer loves and that creates more value, which of course gives us more flexibility for.

Speaker 5: and we think consumers, it's a format that consumers love and that creates more value, which of course gives us more flexibility for our business.

In our business.

Daniel Ek: So our advertising business on one hand, seeing where scale there, which will drive more efficiencies. You mentioned Marketplace. We're heading very nicely there, too, on the business side. And we're offering more and more products to people on the Marketplace side, which is seeing better and better results relative to all the other marketing spend that labels and artists teams are encountering, which, of course, is a great testament for meaning more and more artists will keep on investing with us there.

But.

Well about.

The the bridge between audio books.

Speaker 5: the bridge between audiobooks and the 40% we talked about.

And then the 40% we talked about it yet so.

Speaker 6: Yeah, we're not getting specific to kind of how the modulations are gonna work right now, but I think what I would go back to saying, which I think I've said a couple of times now is, there's obviously always an investment when you launch your product. We don't think it's anything that's going to be material impact, our 2024 Gross Margin trajectory. And we think that it's not a long window until we see audiobooks really being additive to Spotify from a bottom line perspective. you can almost meet 100cent or 100 percent to figures.

Yeah, we're not getting specifics of kind of.

How the monetization going to work right now, but I think what I would go back to saying, which I think I said a couple of times now is.

There is obviously always an investing when you launch a new product. We don't think it's anything that's going to be material impact.

Our 2020 for gross margin trajectory and we think that there's it's it's.

It's not a long window until we see audio books really being additive to.

Daniel Ek: And then on the product side, you're right in pointing out the new UI. It is being fully rolled out. So we're seeing great results with that. AIDJ has been rolled out to many more countries already, but that's the English language one, so you should definitely expect to see local versions of the AIDJ to allow for even more engagement. But that engagement, as I mentioned in my previous response, allows for more flexibility for the business.

Spotify from a bottom line perspective.

And we'll have more to talk about and kind of moving forward.

Speaker 4: All right, next question from Doug Admeth on podcasting. How should we think about the timing for achieving podcast gross margin profitability? And what are the biggest opportunities to improve podcast cost structure going forward?

Alright next question from Doug Amazon podcasts, and how should we think about the timing for achieving podcast gross margin profitability.

And what are the biggest opportunities to improve podcast cost structure going forward.

Speaker 6: Yeah, so let me take the second part first. So I think as Daniel's talked about, for us, it's really a number of things. One is, you know, we're just continuing to look to try and be the most efficient we possibly can as a business. And so that's going to mean investing where we think it makes sense to invest. And it's going to mean thinking about how we can be strategic in areas we can be more strategic. And so on the podcasting side, you've already seen us this year sort of right size parts of the business where we thought it made sense.

Yeah, so let.

Let me take the second part first so I think as Daniel talked about for US. It's really a number of things. One is we're just continuing to look to drive the most efficient we possibly can as a business and so.

Daniel Ek: That allows for either more top line growth through a better proposition at a low price, which will mean we'll grow even faster. Or we have the ability, of course, if we produce a great value to raise prices again to keep that value and price ratio at a good clip. So there are plenty of opportunities in 2024 for the core business to produce. And that's what you should expect.

That's going to mean investing where we think it makes sense to invest in its going to mean thinking about how we can be strategic in areas. We can be more strategic and so on the podcast side you've already seen this this year sort of rightsize parts of the business.

Where we thought it made sense.

Speaker 6: But moving forward, we'll continue to invest. But we also think we're going to continue to get lots of efficiencies. And that's through being smarter about where we spend that podcasting budget, and also continue to grow the advertising on top of it.

But moving forward, we will continue to invest.

But we also think we're going to continue to get lots of efficiencies and that's through being smarter about where we spend that.

Paul Vogel: We are making great progress on ticketing and merch and all these other fronts, too, but they are not yet material drivers, so I don't want any investors to have that expectation. But long-term, they will be, and we're excited about them, but for 2024, it's about delivering on the core, which has plenty more to give. Yeah, and I would just add real quickly to Daniel's point. Obviously, we'll have almost three-fold quarters of the price increase from a growth perspective on the revenue side, impacting 2024.

That podcast in budget and also continuing to grow the advertising on top of it.

Speaker 6: So we we feel like we're on track. I think we gave it the investor day sort of a one to two year timeline to break even on podcasting we're Right in line with that timeline. We should Actually get the break-even in podcasting pretty soon and we feel really good about the the trajectory of the Podcasting trends having gone from a a pretty big drag a year ago to something. That's a pretty minimal drag To something that should be positive to gross profit in the in the pretty short term

So we are we feel like we're on track I think we gave at the Investor day sort of a one to two year timeline to breakeven on podcasting.

Right in line with that timeline, we should.

Actually get to breakeven and podcasts and pretty soon.

And we feel really good about the trajectory of the podcasting trends haven't gone familiar a pretty big drag a year ago to something thats, a pretty minimal drag to something that should be positive to gross profit and they're pretty short term.

Paul Vogel: And then, as Daniel mentioned, advertising businesses improved throughout 2023, so we're hoping that advertising could continue to be a driver in 2024 as well. I forgot to mention, by the way, on the audiobooks side, which you asked about as well. So, yes, we do think audiobooks will be helpful to the 2024 results as well, but it will be early days, of course. It's still an early product development, early launch. And the primary focus is to bring it out in more money. Markets. Great.

Speaker 5: Yeah, and maybe just, Doug, as an added reminder, unlike, say, the music business, which has more of a variable cost structure, podcasting has more of a fixed cost basis and a variable too. But the biggest proponent so far has been the fixed cost based structure. So what helps there is obviously if you take down the fixed cost based structure. But the other thing that helps is more scale.

And maybe just the dog as a as an added reminder, unlike say the music business, which has more of a variable cost structure of podcasting has.

More of a fixed cost basis, and the variable too, but the biggest proponents so far has been the fixed cost base and structure. So what helped there is obviously if you take down the fixed cost base structure, but the other thing that helps us more scale. So if you bring in more advertising dollars across that you'll start seeing gross margins improving.

Speaker 5: So if you bring in more advertising dollars across that, you'll start seeing gross margins improving. So both of those things have been true. We've been reining back on some of the spending, but we have also increased the revenues.

Justin Patterson: Another question from Justin Patterson. This one's on subscription pricing. Spotify is now delivering a lot more value through product innovation and the inclusion of audiobooks. It also seems like churn was minimal from recent price increases. So given these dynamics, how's your approach towards pricing as a lever changing versus what we've observed in the past?

So both of those things have been through we've been reining back on some of the spending but we have also increased the revenues on podcasting too.

Speaker 4: Next question from Benjamin Black on operating expenses. You obviously made some hard decisions on headcount reductions this year. When looking forward to fourth quarter in 2024, how should we be thinking about the pace of operating expense and headcount growth? And also, is there more room to tighten up expenses?

Okay next question from Benjamin Black on operating expenses, you, obviously made some hard decisions on head count reductions this year when looking forward to fourth quarter in 2024, how should we be thinking about the pace of operating expense and head count growth and also is there more room to tighten up expenses.

Daniel Ek: Well, I think that there's two past past to mention. One was before this prior quarter and one is going forward. And we talked about this when we did a race prices that are we were adding a leg to the stool. So again, to kind of bringing everyone back in context, we had plenty of growth drivers. We can grow in a market by keeping the price relatively low and grow top line that grows the market and grows our revenue.

Speaker 6: Yes, so I'm not going to give any 2024 guidance yet. We'll do that on the next quarter. So really what I'll do is kind of reiterate what we've said already, which is, you know, as a company and as a business, we want to be as efficient as we possibly can. And so that's something that is not a one-time thing. Some of the changes we made in 2023,

Yeah, So I'm not going to give any 2024 guidance yet we'll do that on the next quarter.

So really what I'll do is kind of reiterate what we said already which is you know as a company and as a business we want to be as efficient as we possibly can.

And so that's something that is not a onetime thing.

Some of the changes we made in 2023.

Speaker 6: We're not sort of one time in nature, this is the way we're running the business. We've talked about, we believe we have a best in class product and we want to become a best in class business as well. And so we'll continue to look whether it's 2024, 2025 or 2026 about how we can run the business as efficiently and effectively as we possibly can. And so that's just, you know, how we think about it moving forward. And hopefully, you know, our expectations that will translate into kind of hitting all the margin targets we laid out at the investor.

Daniel Ek: We can of course, again, increase the engagement even further and have more advertising. That's another way to grow our business. And then we have the third level lever, of course, which is to grow through price increases. We hadn't up until that point used the lever of price increases to a great extent. We did feel really good about what we learned there. So it's definitely part now of the arsenal of tools we can deploy to keep growing the business.

We're not sort of onetime in nature. This is the way we're running the business.

We've talked about we believe we have a best in class product and we want to become a best in class business as well and so we'll continue to look whether it's 'twenty 'twenty four 'twenty five or 26 about how we can run the business as.

As efficiently and effectively as we possibly can.

So that's just.

How we think about it moving forward and hopefully our expectation is that will translate into kind of hitting all the margin targets, we laid out at the Investor day.

Daniel Ek: And I think you should expect us to use that when we see the appropriate dynamics. But the primary thing, again, just the levels that with investors, why you're seeing the top line growth the way you are is because we're providing an amazing value to consumers. That is the primary thing we are focused on to keep on delivering amazing value. And then when we get to that amazing value, then, of course, we have more flexibility and we can choose to increase prices to get that value to price ratio and the right balance. So we definitely have a lot more opportunities going forward and we feel really confident given what we've learned at this price increase.

Speaker 4: It looks like Ben's got another one here on music economics. Without getting into the details from your price negotiations with the labels, I'm curious to hear how the win-win played out. Is it related to better economics on the ad-supported side, marketplace commitments, more flexibility to introduce new tier options by bundling services like audiobooks or anything else?

Okay. It looks like <unk> got another one here on music economics without getting into the details from your price negotiations with the labels I'm curious to hear how the win win played out as it related to better economics on the AD supported side marketplace commitments more flexibility to introduce new tier options by bundling.

Services like audio books or anything else.

Speaker 5: Yeah, well, as you know, Ben, we don't comment on the specifics around our negotiations with any rights holders. But what I can say in general terms is – and I've used this analogy before.

Yeah.

Well as you know Ben we don't comment on the specifics around our negotiation negotiations with any rights holders, but what I can say in general terms is and I've used this analogy before.

Speaker 5: When we really go <expletive> with our partners, this is something that's constantly ongoing pretty much every year. It is kind of trade, it's like a trade agreement being really go <expletive> . There are lots of things in the agreement.

When when we renegotiate with our partners. This is something that's constantly ongoing pretty much every year. It is kind of trade. It's like a trade agreement being renegotiated there are lots of things in the agreement.

Benjamin Black: All right. Next question is going to come from Benjamin Black on Gross Margin. You've guided the sequentially improving gross margins for all of 2023. When we look forward to 2024, given the price increases in improving profitability at podcasts, should a similar gross margin progression hold true? Yeah. So I'd say a couple things here. One is for first on the podcasting side, yeah, we've seen the improvements in the podcasting business and we talked about how that's been to drag on our gross margins and we expected it to soon reach break even and then become some it's actually added to gross profit.

Speaker 5: A lot of things that the labels want from Spotify, a lot of things that Spotify wants from labels, including clearing up things like, small things like lyrics, how it works, what the payment terms are, et cetera, new market entries, just a whole host of things. So it's not one thing, it is a lot of different things, including some of the things that you're talking about. The end goal of those things, and why I talk about it as a win-win though, is that I think the investor community focuses.

Lots of things that the labels one from Spotify lots of things that Spotify wants from labels, including clearing up things like small things like lyrics, how it works what the payment terms are et cetera, or new market entries.

Benjamin Black: So we're on track on the podcasting side there and that should continue to be helpful into 2024. Same with the music side in terms of incremental gross margins there as well. When you think about the audiobook side of it, there's obviously some investment anytime you launch a new business. But again, as I said earlier, we feel really good about continuing to have a nice progression in gross margins into 2024.

Just a whole host of things. So it's not one thing it has a lot of different things, including some of the things that you were talking about the end goal of those things and why I talk about it as a win win though is that I think the investor community focuses too much on this being a sort of one side when the other stuff.

Speaker 5: too much on this being sort of one side win, the other side has to lose. This is not how we view it. I've said this before, but I will repeat again. What has happened in the history of Spotify is that both sides win.

It has to lose this is not how we view it I've said this before but I will repeat again.

What what has happened in the history of Spotify is that both sides win so as the business grows. It also helps the labels and publishers greatly and in doing so we all get better economics with more scale.

Speaker 5: So as the business grows, it also helps the labels and publishers greatly. And in doing so, we all get better economics with more skills.

Paul Vogel: We'll give more specific guidance on the next earnings call. The only thing is when you think about sequentials, we do tend to have some seasonality in Q1 versus Q4. Some years it's more material than others obviously advertising. It tends to be one of the slower course from an advertising perspective. But we are expecting gross margins to be to be improved in 2024. And we feel really good about hitting all the targets we talked about the investor day and the significant progress we've already made to date. All right.

Speaker 5: And so, you know, this is very much what both us and the partners are expecting going forward. We are very much doing this in symbiosis to drive the continued development of the music business. We're not trying to sort of score small points.

And so you.

You know this is very much what both us and the partners are expecting going forward.

We are very much doing this as symbiosis to drive the continued development of the music business, we're not trying to sort of score small points and then.

Speaker 5: The big question you may ask then, well, how should we assume that gross margin will keep on improving? And a big part of that is by providing more services for the industry. We talked about marketplace as a great example, just to reiterate the point.

The Big question you May ask then well how should we assume that gross margin will keep on improving and a big part of that is by providing more services for the industry.

<unk> talked about marketplace is a great example, just to reiterate the point.

Doug Edmuth: Next question is from Doug Enmouth on audiobooks. Can you talk about the cost structure and the economics of audiobooks? How should we think about the impact of gross margin in fourth quarter and into 2024?

Speaker 5: Today it is very expensive for a label to market an artist.

Today, It is very expensive for a label to market and artists in all the various channels that they're doing it's very hard through the changes that Apple and others made for tracking to happens it's very hard to attribute.

Speaker 5: in all the various channels that they're doing. It's very hard through the changes that Apple and others made for tracking to happen. So it's very hard to attribute all the way through a stream what's happening. Obviously, on the Spotify platform, we can do that directly from being at the point where people discover music to being at the place where people discover music, then consuming that music, which of course drives.

Paul Vogel: And what gives you confidence in adoption by subscribers? Yeah, so I guess I'm just kind of reader what I said, which is obviously there's always going to be there's some costs whenever you you launch a new product. But you'll see that the gross margins are up Q3, Q4. And as I said a couple of times now we do expect gross margins to be up again in 2024 and we expect to continue to see that nice progress we've made on the gross margin side and the operating profit side into 2024.

All the way through a stream what's happening obviously on the Spotify platform, we can do that directly from being at the point, where people discover music to being at the place where people discover new then consuming that music, which of course drives them.

Speaker 5: an unparalleled consumer experience and unparalleled marketing experience. That is a great way where we can help reduce the marketing cost for labels and obviously earn a share of that revenue back.

An unparalleled consumer experience and unparalleled marketing experience that is a great way, where we can help reduce the marketing cost for labels and obviously earn a share of that revenue back.

Daniel Ek: And the confidence on adoption of subscribers I'll start maybe Daniel has some thoughts here, but I think as Daniel mentioned you know it's early days but we feel really good about the first you know couple of weeks to month in the markets we've launched in and you know we just believe it's it's going to be a great product. It's going to open up more authors to more consumers. And what we've seen in the past is when we enter a business the business becomes bigger.

Speaker 5: That is why we're so excited about our gross margin projection. That was exactly what we said at 2018, and that is what is being played out in a pretty big way in our improved music gross margins as well. So it's not a sort of win-lose scenario. It is truly a win-win between us and the rights holders.

That is why we're so excited about our gross margin projection that was exactly what we set a 2018 and that is what what is being played out in a pretty big way in our improved music gross margins as well so it's not a sort of wind.

Daniel Ek: The podcasting business is a much bigger global business because Spotify is a part of that business now and we think we're going to have the same benefit on the audiobook side which will be great for authors and great for consumers.

Win lose scenario it is truly a win win between us and the rights holders.

Okay. Next question is going to come from Mike Morris on subscription <unk>.

Speaker 4: The constant currency premium ARPU growth trend improved from negative 3% last quarter to negative 1% in this quarter. Can you share more detail on the drivers? What do you think is a normal amount of drag from product or market mix?

Your constant currency premium our approved growth trend improved from negative 3% last quarter to negative 1% in this quarter can you share more detail on the drivers. What do you think is a normal amount of drag from product or market mix and.

Daniel Ek: Yeah and and we feel you know great again as I mentioned in my opening remarks with the adoption in in UK and Australia and and just as a reminder to investors we are planning to launch in the US this coming winter as well. So you're definitely going to see us expand audiobooks and already with this initial launch it is positive it's early days but we're encouraged with what we're seeing and the most important thing is when you think about the consumers that are trying out the experience they're loving it and they're finding it's a really natural part of the Spotify experience and a great value ad and that speaks to this earlier point we made about sort of consistently improving the experience by adding more things for creators than consumers alike and then every now and then adding these verticals that just step shame make step changes in the value proposition that we're doing.

Speaker 4: And how much price-related positive impact was there in third quarter, and how much is implied in your fourth quarter revenue guide.

And how much price related positive impact was there in third quarter and how much is implied in your fourth quarter revenue guidance.

Speaker 6: Yeah, so when you look at the ARPU trends, let's sort of take the product-market mix, it's really been on the product side.

Yeah. So when you look at the ARPA trends.

What sort of take the product market mix.

It's really been.

On the product side, you know we've.

Speaker 6: Can you have just you know slightly larger share on family plans Quarter over quarter in year-ever year. So that's sort of the product mix which has been sort of a very it's a small drag But that's kind of where it's been It's hard to guide where that's gonna go if that's gonna continue to increase or flatten out But that's been the the real reason of sort of the very kind of modest, you know, 1% or so 1 to 2% Impact on our poo and then

Can you would have just slightly larger share on family plans.

Quarter over quarter and year over year. So that's sort of the product mix, which has been sort of a very it's a small drag, but that's kind of where it's been.

It's hard to guide, where that's going to go if that's connected to increase or flatten out, but that's been the the the real reason of sort of the very kind of a modest 1% or so 1% to 2%.

Impact on <unk> and then.

Rich Greenfield: Okay next question from Rich Greenfield on marketing efficiency. You accelerated user and revenue growth while cutting marketing spend can you help us understand what's enabled this dynamic and whether you believe it's sustainable into 2024.

Speaker 6: There was a little bit of an impact from the price increase in Q3. We'll expect to see a much bigger impact in Q4.

There was a little bit of an impact from the price increase in AR in Q3, we'll expect to see a much bigger impact in Q4. So if you think about the price increase and then you think about the fact that the price increase hit about 75% of our revenue base, we expect a price increase to be a positive.

Speaker 6: So if you think about the price increase and then you think about the fact that the price increase hit about 75% of our revenue base, we expect the price increase to be a positive mid-single digits ARPU benefit to Q4.

Daniel Ek: Yeah Rich I would really make it a testament to this focus on efficiency as we talked about you know again it is marvelous when the team focuses on something here at Spotify we tend to achieve it and when Paul and I kind of set that objective for the teams what started happening was they started focusing a lot more on the performance marketing mix some of the initiatives that we were doing we were pulling back from other things we were doubling down on others and we started seeing top line holding up into even accelerating at a lower marketing expense and we've seen this trend now play out for a few quarters initially I was kind of skeptical whether that would be able to keep going but with the recent learnings it seems very possible that is the case and that we are simply increasing our rate of learning at a great pace across the marketing team and that I think is a very positive sign going into 2020 24.

Mid single digits.

Benefit to Q4.

FX neutral benefit.

Speaker 4: Okay, another question from Doug Ameth on Marketplace. How should we think about current Marketplace growth relative to the approximate 40% year-on-year growth you realized in 2022?

Okay. Another question from Doug Amazon marketplace how.

How should we think about current marketplace growth relative to the approximate 40% year on year growth you realized in 2022.

Speaker 6: Yeah, so I think as Daniel said, you know, Marketplace is one part of the equation and everything we've done. It has grown very nicely. We haven't given out specific numbers, but it continues to be a big driver of growth for us on the margin side. And it's just really just about adding more value into the ecosystem. Our Marketplace only works.

Yeah. So I think as Daniel said marketplaces is one part of the equation and everything we've done it has grown very nicely.

We haven't given out specific numbers, but it continues to be a big driver of growth for us on the margin side and it is really just about adding more value into the ecosystem our marketplace only works if it's working for the labels. So if our label partners feel like Theyre benefiting from marketplace, then we'll benefit as well and so that's been the case, we expect it to continue to be the case.

Speaker 6: if it's working for the labels. So if our label partners feel like they're benefiting from Marketplace, then we'll benefit as well. And so that's been the case. We expect it to be the case. And it has definitely been one of the components that's helped the music margin.

It has definitely been one of the components that's helped the music margins improve.

Paul Vogel: Alright, another one from Rich Greenfield on advertising. Advertising growth, constant currency accelerated to 24% from low-to-mid teens at the past couple quarters. What's driving that acceleration and how are you feeling about the time period ability to drive advertising towards 20% of overall revenues compared to 13% today? Yeah, so the quarter just saw a nice acceleration both on music side and the podcasting side on constant currency. So it was across the board.

Speaker 4: Another one from Mike Morris. Again, on audiobooks, how much impact does audiobooks have on the fourth quarter gross margin guidance? And what are the factors that drive audiobooks gross margin impact over time? What type of usage is required for the product to be accretive to gross margin?

Okay. Another one from Mike Morris.

Then on audiobooks, how much impact is audio books have on the fourth quarter gross margin guidance and what are the factors that drove drive audiobooks gross margin impact over time, what type of usage is required for the product to be accretive to gross margin.

Speaker 6: Um, yeah, so there is a, there is a small impact, um, uh, in Q4. Um, as I said, anytime you launch a new product, there's going to be some investment there. Um, but as I said, you know, we continue to see, you know, gross margins up sequentially Q3 to Q4, um, and we expect them to, uh, to improve again, uh, nicely in, in 2024, uh, as well, um,

Yeah. So there is a there is a small impact.

In Q4, as I said anytime you launch a new practice is going to be some investment there.

Paul Vogel: You know, we're doing a good job of selling, we're improving the tools, we're improving the automation side of the world. And honestly, we're doing a good job of selling across both music and podcasting. So having both of them in the ecosystem is really, really helpful, which I think we've talked about before in the past. And so that's been a lot of the driving growth. I don't know if we'll have an update to give you in terms of 20%.

But as I said, you know what we continue to see gross margins up sequentially Q3 to Q4.

And we expect them to to improve again nicely in 2024 as.

As well.

Speaker 6: It's hard to talk about the factors that drive over time, because as I said, as the business model evolves over time, we'll share more information on that. And sort of same thing on the usage side. I think for us right now, what we're really trying to drive is, how does this become another great product for Spotify? How does it continue to grow usage and engagement? And we know that when people interact with more than one

It's hard to talk about the factors that drive over time, because as I said is that as we as the business model evolves over time, we'll share more information on that.

Paul Vogel: It's not necessarily a target we shoot for. I think what we've said in the past is we believe over time that advertising continues to grow. It could become 20% or more. But we feel good about the acceleration on the advertising side in Q3 and the trends, you know, how they've improved throughout the year.

And sort of the same thing on the on the usage side I think for US right now what we're really trying to drive is how does this become another great product for Spotify, how does it continue to grow usage and engagement.

And we know that when people interact with more than one.

Speaker 6: part of Spotify, they retain higher, they're more engaged. So we've seen it before in podcasting. People who use both music and podcasting are more engaged, they spend more time on the service. They're lower churn, they retain higher. And our expectation is that audiobooks will be just one more factor that will help with all of that.

Part of Spotify, they retain higher they're more engaged so we've seen it before in podcast thing people, who use both music and podcasting are more engaged and they spend more time on the service, they're lower churn they retain higher and our expectation is that audio books will be just one more factor that will help with all of them.

Benjamin Black: Okay, Benjamin Black on audiobooks. Audiobooks monetization is via over its charges. But how do you think about medium-term monetization of this offering?

Daniel Ek: Will there be additional tiers with discrete payments for access? And at your investor day, you highlighted 40% plus gross margins for audiobooks. What's the bridge from this offering to hitting those targets? Yeah, I'll start and maybe Paul can chime in. So I think first and foremost, it's very early days on the audiobook side, but we're encouraged with what we're seeing. So you're right in that this is included in the premium offering.

Okay I've got a question from Zach Morrissey on other cost of revenue.

Speaker 4: Can you share more color on what's driving the improvement in other cost of revenue? Is there opportunity for further improvement in 2024?

Can you share more color on what's driving the improvement in other cost of revenue is there opportunity for further improvement in 2024.

Speaker 6: Yeah, I mean, again, that's a lot of the stuff that is the blocking and tackling of just trying to become a more efficient business that over time, we started to see some benefits. And so within that other cost of revenue, you've got cloud costs and streaming delivery costs. You've got customer service. You've got payment fees. So some of those just improve with scale. Some of those improve with becoming more efficient and being smarter about how you.

Yeah, I mean again, that's that's a lot of the stuff that is the blocking and tackling of just trying to become a more efficient business that over time.

We started to see some benefits and so within that other cost of revenue you've got.

Daniel Ek: It is one of the benefits obviously that our members are getting and that in turn gives us more flexibility as a business that we talked about. Just as a reminder, however, the offering available for consumers is 15 hours a month. For consumers that hit that base or subscribers that hit that base of 15 hours a month, there is the ability to top up. So there's already today the ability for discrete payments where consumers can upgrade.

Cloud costs and streaming delivery costs, you've got customer service, you've got payment fees.

Some of those just improve with scale some of those improve as becoming more efficient and being smart about how you are.

Speaker 6: how you run your business. And so, you know, we're always gonna look for ways to optimize and become more and more efficient in those areas. But yes, that's part of some of the improvements you've seen is again, just that greater focus on efficiency and making sure that our overall gross margins are improving. You know, obviously the largest percentage of our gross margins has to do with royalties we pay to all of our different rights holders. But other costs of revenue is material and we do focus on it. And it has been something that's improved throughout the year.

How you run your business and so you know, we're always going to look for ways to optimize to become more and more efficient in those areas, but yes. That's part of some of the improvements you've seen is again, just a greater focus on efficiency and making sure.

Better that our overall gross margin and improving.

Obviously, the largest percentage of our gross margins has to do with royalties, we pay to all of our different rights holders, but other cost of revenue is material and we do focus on it and it has been something that's improved throughout the year.

Daniel Ek: And we're already seeing consumers doing that in ways we probably wouldn't have imagined where some consumers are heavily upgrading and being really heavy audiobook listeners already day one. But obviously the base is very small, so it's impossible for us to say where that leads to long term. But the ability exists and I think it'll be a part of our business. But we also of course think that being part of this subscription is what the real value is because it will expand the market of audiobooks.

Speaker 4: All right, and we've got time for one more question, and that's gonna come from Maria Ripp.

Alright, and we've got time for one more question and that is going to come from Maria rips.

Speaker 4: on AI. It seems like across the space, generative AI-powered tools are improving advertiser-creative and leading to better KPI performance. Is Spotify investing in generative AI to improve its products for advertisers? And if so, are you seeing any tangible improvements in ad performance?

On AI it seems like across the space generative AI powered tools are improving advertiser creative and leading to better Kpis performance is Spotify investing in generative AI to improve its products for advertisers and if so are you seeing any tangible improvements in ad performance.

Speaker 5: Yeah, so there are plenty of things we're doing generally speaking to AI and machine learning to improve our advertising products, everything from improving, of course, targeting and so forth. But as you're speaking to...

Yeah.

Daniel Ek: And we think consumers it's a format that consumer loves and that creates more value which of course gives us more flexibility for our business. Yeah, we're not getting any specifics of kind of how the modulations are going to work right now, but I think what I would go back to saying, which I think I've said a couple times now, is there's obviously always an investment when you launch a new product. We don't think it's anything that's going to be material impact our 2024 gross margin trajectory. And we think that there's it's not a long window until we see audiobooks really being additive to Spotify from a bottom line perspective.

So there there are plenty of things, we're doing generally speaking to AI and machine learning to improve our advertising products everything from improving of course targeting and so forth but.

Esther speaking to generative AI, specifically I think the biggest single thing, we could do and that we're experimenting with and the teams are expanding with is enabling more opportunities for advertisers creative to be created so let me expand on that for a moment. So if you think about our advertiser.

Speaker 5: generative AI specifically, I think the biggest single thing we could do and that we're experimenting with and the teams are experimenting with is enabling more opportunities for advertisers creative to be created.

Speaker 5: So let me expand on that for a moment. So if you think about our advertising format relative to, say, many others, it lives in this kind of nice segue on the one end where it is not as easy to produce as text ads, what you see on other platforms, and it's obviously not as hard.

Format relative to say many others.

It lives in this kind of a nice segue on the one end where it is not as easy to produce as text ads, what you see on other platforms.

It is obviously not as hard to produce as a video ad.

Paul Vogel: We'll have more to talk about. Got moving forward.

Speaker 5: And so we think there's an enormous opportunity for us to apply generative AI to create really compelling audio advertisements for marketeers.

And so we think there's an enormous opportunity for us to applied generative AI to create really compelling audio advertisements for for our marketeers and today, creating and a great audio AD is something that's quite costly and quite expensive expensive for them.

Doug Edmuth: All right. Next question from Doug Edmiff on podcasting. How should we think about the timing for achieving podcast gross margin profitability? And what are the biggest opportunities to improve podcast cost structure going forward? Yeah, so let me take the second part first. So I think as Daniel talked about for us, it's really a number of things. One is, you know, we're just continuing to look to try and be the most efficient we possibly can as a business.

Speaker 5: And today, creating a great audio ad is something that's quite costly and quite expensive for marketeers to do.

Marketers to do are they.

They obviously already make that investment when it comes to video because theres plenty of platforms that are available but were one of the few that offers audio ads in a big way on the scale that we're doing so that that's definitely a bit of a hurdle will getting advertise on there. So what generative AI has the promise to do is of course to allow for.

Doug Edmuth: And so that's going to mean investing where we think it makes sense to invest. And it's going to mean thinking about how we can be strategic and areas we can be more strategic. And so on the podcasting side, you've already seen this year's sort of right size parts of the business where we thought it made sense. But moving forward, we'll continue to invest, but we also think we're going to continue to get lots of efficiencies.

Speaker 5: in a big way on the scale that we're doing. So that's definitely a bit of a hurdle getting advertisers on there. So what generative AI has the promise to do is of course to allow for that creative cost to come down. But not only that, but it allows you to scale that creative in unimaginable ways. So you can translate whatever creative you had to lots of different languages. You can use the same voice actor, but instead of producing one or two ads, you can have 1,000 or 10,000 or even 100,000 ads that are individually created to each user that gets to hear this. So there's lots of possibilities.

For that creative cost to come down, but not only that but it allows you to scale that creative in unimaginable ways. So you can translate whatever creative you had lots of different languages. You can use the same volte voice actor, but instead of producing one or two ads you can have 1000 or 10000 or.

Doug Edmuth: And that's through being smarter about where we spend that that podcasting budget and also continue to grow the advertising on top of it. So we feel like we're on track. I think we gave it the investor day, sort of a one to two year timeline to break even on on podcasting. We're right in line with that timeline. We should actually get the break even in podcasting pretty soon.

Speaker 5: You can have 1,000, or 10,000, or even 100,000 ads that are individually created to each user that gets to hear this.

100000 ads are individually created to each user that gets to hear that so theres lots of possibilities that lowers the barrier to entry for market tiers on the AD side using generative AI and of course, there's also lots of opportunities are creating more compelling ads, which means they will perform better.

Speaker 5: So there's lots of possibilities that lowers the barrier to entry for marketeers on the ad side using generative AI. And of course, there's also lots of opportunities of creating more compelling ads, which means they will perform better for marketeers as well. So we're really excited about it.

Daniel Ek: And we feel really good about the trajectory of the podcasting trends having gone from a pretty big drag a year ago to something that's a pretty minimal drag to something that should be positive to gross profit in the in the pretty short term. Yeah, and maybe just a dog as an added reminder, unlike say the music business, which has more of a variable cost structure podcasting has more of a fixed cost basis and a variable too.

For market tiers as well so we're really excited about it.

Speaker 5: But the level set, this is the early days, and we are definitely experimenting with the teams on how to do that, and I think it can be a real catalyst for our ads business going forward, but again, to caution everyone, it is early days.

But the level set this is early days and we are.

Definitely experimenting with the teams on how to do that and I think it can be a real catalyst for our ads business going forward, but again to caution everyone. It is early days.

Daniel Ek: But the biggest proponent so far has been the fixed cost based structure. So what helps there is obviously if you take down the fixed cost based structure, but the other thing that helps is more scale. So if you bring in more advertising dollars across that, you'll start seeing growth margins improving. So both of those things have been true. We've been raining back on some of the spending, but we have also increased the revenues on podcasting too.

Speaker 5: And plenty more will happen in this space to bring costs down further and increase quality further just throughout the explosion of all the tools from OpenAI to Google's tools to LLAMA and all the other things that are happening across the ecosystem. So this is not just Spotify, but it's the entire ecosystem that's driving this development further. But I think we have a unique opportunity in our ad product.

And planning more will happen in this space to bring costs down further and increase quality further just throughout the explosion of all the tools from open AI to Google's tools to Lama and all the other things that are happening across the ecosystem. So this is not just spotify, but it's the entire ecosystem that's driving this development further but.

Benjamin Black: Okay, next question from Benjamin Black on operating expenses. You obviously made some hard decisions on head count reductions this year. When looking forward to fourth quarter and 2024, how should we be thinking about the pace of operating expense and head count growth.

But I think we have a unique opportunity in our AD product to bring to bear something where.

Speaker 5: to bring to bear something where you will, of course, see generative video ads, but I think that's a little bit further into the future than seeing generative audio ads in a big way. So we're excited about being able to bring that to market.

You will of course see generative video ads, but I think that's a little bit further into the future than seeing generative audio ads in a big way. So we're excited about being able to bring that to market.

Paul Vogel: And also is there more room to tighten up expenses? Yeah, so I'm not going to give any 2024 guidance yet. We'll do that on the next quarter. So really what I'll do is kind of reiterate what we've said already, which is, you know, as a company and as a business, we want to be as efficient as we possibly can. And so that's something that is not a one time thing. Some of the changes we made in 2023.

Speaker 5: hopefully, you know, relatively soon and then playing a big part in 2024 and beyond.

Hopefully you know relatively soon and then playing a big part in 2024 and beyond.

Speaker 4: Great. Thanks, Maria. And that's going to conclude our Q&A session on today's call. And so with that, I'm going to hand the floor back over to Daniel for some closing remarks.

Great. Thanks, Maria and that's going to conclude our Q&A session on today's call and so with that I'm going to hand, the floor back over to Daniel for some closing remarks.

Speaker 5: All right. Well, thank you, Brian . So, in closing, as you can see, we're feeling very good about the progress and results. So, lots of the actions we've taken over the last 12 months are really bearing fruit. And I feel very confident that we are well on our way of being both a great product and a great business.

Alright, well. Thank you Brian So in closing as you can see we're feeling very good about the progress and results. So lots of the actions we've taken over the last 12 months are really bearing fruit and I feel very confident that we are well on our way of being both a great product and a great business. So thank you again for joining us.

Paul Vogel: We're not sort of one time in nature. This is the way we're running the business. We've talked about, we believe we have a best in class product and we want to become a best in class business as well. And so we'll continue to look whether it's 2024, 25 or 26 about how we can run the business as efficiently and effectively as we possibly can. And so that's just how we think about it moving forward.

Speaker 5: So thank you again for joining us, and as usual, please feel free to check out our For the Record podcast dropping later today.

And as usual please feel free to check out our for the record podcast dropping later today.

Paul Vogel: And hopefully in our expectations that will translate into kind of hitting all the margin targets we laid out at the investment.

Speaker 4: Okay, 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.

Okay 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.

Daniel Ek: Okay, it looks like Ben's got another one here on Music Economics, without getting into the details from your price negotiations with the labels. I'm curious to hear how the win-win played out, is it related to better economics on the ad supported side, marketplace commitments, more flexibility to introduce new tier options by bundling services like audiobooks or anything else. Yeah, well, as you know, Ben, we don't comment on the specifics around our negotiations with any right holders, but what I can say in general terms is, I've used this analogy before, when we really negotiate with our partners, this is something that's constantly ongoing pretty much every year.

Speaker 3: This concludes today's conference call. Thank you for your participation. You may now disconnect.

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

Speaker 1: I was recruited into an MLM by someone who convinced me that we were friends because she saw herself in me.

I was recruited into an MLM by someone who convinced me that we were friends because she saw herself and me.

Speaker 1: She played on my emotions, knowing I wanted to leave the military, and told me to put the kit cost on my credit card because she could train me to earn it back.

He played on my emotions, knowing I wanted to leave the military and told me to put the kit costs on my credit card because she could train me to earn it back.

Speaker 1: Fast forward a few months, and despite doing everything she coached me to do, I was exhausted and losing money.

Fast forward, a few months and despite doing everything she coached me to do I was exhausted and losing money.

Speaker 1: It got so bad financially that I quit with loads of credit card debt.

It got so bad financially that I quit it's loads of credit card debt.

Speaker 1: And that friend, she told me that I gave up, blocked me, and never spoke to me again. Janice, forever.

And that French sheath.

Daniel Ek: It is kind of trade, it's like a trade agreement being really negotiated. There are lots of things in the agreement, lots of things that the labels won from Spotify, lots of things that Spotify wants from labels, including clearing up things like small things, like lyrics, how it works, what the payment terms are, et cetera, a new market entries, just a whole host of things. It's not one thing, it is a lot of different things including some of the things that you're talking about.

She told me that I gave up blocked me.

Never spoke to me again.

Janice former MLM rats.

Speaker 1: In early 2014, by all accounts, my life was pretty great. I had a supportive spouse, beautiful kids, and a comfortable life. And yet, something felt like it was missing.

In early 2014 by all accounts my life was pretty great I had a supportive spouse beautiful kids and a comfortable life.

And yet something felt like it was missing.

I couldn't quite put my finger on it.

Speaker 1: After our last child was born, I remembered thinking, what's next?

After our last child is born I remember thinking what's next.

Daniel Ek: The end goal of those things and why I talk about it as a win-win, though, is that I think the investor community focuses too much on this being a sort of one-side win, the other side has to lose. This is not how we view it. I've said this before, but I will repeat again, what has happened in the history of Spotify as the both sides win. As the business grows, it also helps the labels and publishers greatly.

Speaker 1: Despite being busy with five kids, I felt like I had to be doing more. Was being a state.

Despite being busy with five kids I felt like I had to be doing more.

With being a stay at home mom in Nash.

Speaker 1: I looked around at other moms who worked from home or worked full-time and thought, how do they do it? And they probably looked at me and asked the same thing. Did anyone actually have it figured out? Why did we do it?

I looked around at other moms, who worked from home are worked fulltime and thought how do they do it and they probably looked at me and asked the same thing.

Did anyone actually haven't figure it out.

Why don't we all feel like we should be doing more.

Speaker 1: I felt like a martyr most days, and I knew I wasn't alone.

I felt like a martyr most days and I knew I wasn't alone.

Speaker 1: In many ways, women have internalized the idea that we must do it all, while also taking on the brunt of housework, childcare, and the emotional and mental labor of managing a household full of different people with varying needs, all at our own expense.

In many ways women have internalized the idea that we must do it all while also taking on the Brent housework childcare and the emotional and mental labor managing a household full of different people with varying needs all at our own expense.

Daniel Ek: In doing so, we all get better economics with more scale. This is very much what both us and the partners are expecting going forward. We are very much doing this in symbiosis to drive the continued development of the music business. We're not trying to score small points. Then the big question you may ask then, well, how should we assume the gross margin will keep on improving. A big part of that is by providing more services for the industry.

Speaker 1: I'd tried many coping mechanisms to fill the void, wine, other people, over-scheduling myself, but I always ended up feeling less than, alone and isolated.

I tried many coping mechanisms to fill the void wine other people over scheduling myself.

But I always ended up feeling less than alone and isolated.

Speaker 1: That was until I found what could be the solution to all my problems, a business in a box.

That was until I found what could be the solution to all my problems are.

Business in a box.

Daniel Ek: We talked about marketplace as a great example, just to reiterate the point. Today, it is very expensive for a label to market an artist in all the various channels that they're doing. It's very hard through the changes that Apple and others made for tracking to happen. It's very hard to attribute all the way through a stream what's happening. Obviously, on the Spotify platform, we can do that directly from being at the point where people discover music to being at the place where people discover music.

Speaker 1: Babe, I left Rowan's blanket downstairs. Can you grab it when you come up?

Babe Lash Rollins blanket downstairs can you grab it when you come up.

Daniel Ek: Then, consuming that music, which of course drives an unparalleled consumer experience and unparalleled marketing experience. That is a great way where we can help reduce the marketing costs for labels and obviously earn a share of that revenue back. That is why we're so excited about our gross margin projection. That was exactly what we said in 2018 and that is what is being played out in a pretty big way in our improved music gross margins as well. It's not a sort of win-lose scenario. It's truly a win-win between us and the rights, shoulders.

Speaker 1: I'm snuggling with my two-year-old, crammed into a toddler bed where I end up falling asleep many nights, much to the chagrin of my aching bad.

And Snuggling with my two year old crammed into a toddler bed, where I end up falling asleep. Many nights much to the chagrin of my aching back but.

Speaker 1: But not tonight. Tonight, I'll be meeting a friend I haven't seen in almost 20 years. Okay, friend is a bit of a stretch. Becky's from my hometown, and we went to the same high school, but we're never close. In fact, I'm pretty sure we've never spoken. She was a few years younger than me in school, and quiet, but always very sweet.

But not Tonight.

I'll be meeting a friend I haven't seen in almost 20 years.

Okay friend is a bit of a stretch.

Thank you from my hometown and we went to the same high school, but we're never close in fact, I'm pretty sure we've never spoken.

She was a few years younger than me in school and quiet, but always very sweet.

Speaker 1: She friended me on Facebook a while back, and I happily accepted. Back then, Facebook was still pretty new and a fun place for sharing pics of kids with people you hadn't seen in 10 years, instead of the minefield of ads, sales, politics, misinformation, and anxiety driven by bizarre algorithms that it is today. So getting friend requests from past acquaintances wasn't out of the ordinary, the good old days.

She Friended me on Facebook, a while back and I happily accepted.

Back then Facebook was still pretty new and a fun place for sharing picks of kids with people you hadn't seen in 10 years.

Instead of the minefield ads sales politics, misinformation and anxiety driven by bizarre algorithms that it is today, so getting friend requests from past acquaintances wasn't out of the ordinary the good old days.

A few weeks prior Becky had reached out via messenger and told me she'd be in Seattle for a workshop she'd asked if I'd like to get wind during our visits.

And in real life and visits from a human woman and <unk>.

Mike Morris: Okay, next question is going to come from Mike Morris on subscription RPU. Your constant currency premium RPU growth trend improved from negative 3% last quarter to negative 1% in this quarter. Can you share more detail on the drivers?

Eight out away from my Kids truly she had me it wine.

I said, yes without.

Paul Vogel: What do you think is a normal amount of drag from product or market mix? And how much price related positive impact was there in third quarter? And how much is implied in your fourth quarter revenue guidance? Yeah, so when you look at the RPU trends, let's sort of take the product market mix. It's really been on the product side. You know, we've community have just, you know, slightly larger share on family plans, quarter over quarter and year over year.

Paul Vogel: So that's sort of the product mix, which has been sort of a very, it's a small drag, but that's kind of where it's been. It's hard to guide where that's going to go if that's going to continue increase or flatten out, but that's been the real reason of sort of the very kind of modest, you know, 1% or so, 1% to 2% impact on RPU. And then there was a little bit of an impact from the price increase in Q3.

Paul Vogel: We'll expect to see a much bigger impact in Q4. So if you think about the price increase and then you think about the fact that the price increase hit about 75% of our revenue base, we expect the price increase to be a positive mid-single digits RPU benefit to Q4. I beg your pardon, FX neutral benefit.

Doug Ameth: Okay, another question from Doug Ameth on Marketplace. How should we think about current marketplace growth relative to the approximate 40% year-on-year growth you realize in 2022? Yeah, so I think as Daniel said, you know, Marketplace is one part of the equation and everything we've done. It has grown very nicely. We haven't given out specific numbers, but it continues to be a big driver of growth for us on the margin side. And it's just really just about adding more value into the ecosystem.

Doug Ameth: Our marketplace only works if it's working for the labels. So if our label partners feel like they're benefiting from Marketplace, then we'll benefit as well. And so that's been the case. We expected it to be the case.

Daniel Ek: And it has definitely been one of the components that's helped the music margins improve. Okay, another one from Mike Morris. Again, on audiobooks, how much impact does audiobooks have on the fourth quarter growth margin guidance? And what are the factors that drive audiobooks growth margin impact over time? What type of usage is required for the product to be accreted to growth margin? Yes, so there is a small impact in Q4. As I said, anytime you launch into your practice, there's going to be some investment there.

Daniel Ek: But as I said, you know, we continue to see, you know, growth margins up sequentially, Q3, Q4, and we expect them to improve again nicely in 2024 as well. It's hard to talk about the factors that drive over time, because as I said, as we, as the business model evolves over time, we'll share more information on that. And sort of the same thing on the usage side. I think for us right now, what we're really trying to drive is, you know, how does this become another great product for Spotify?

Daniel Ek: How does it continue to grow usage and engagement? And we know that when people interact with more than one part of Spotify, they retain higher. They're more engaged. So we've seen it before in podcasting. People who use both music and podcasting are more engaged. They spend more time on the service. They're lower chair and they retain higher. And our expectation is that, you know, all your books will be just one more factor that will help with all of that.

Benjamin Black: Okay, we've got a question from Zach Morrissey on other costs of revenue. Can you share more color on what's driving the improvement in other costs of revenue? Is there opportunity for further improvement in 2024?

Paul Vogel: Yeah, I mean, again, that's a lot of the stuff that is the blocking tackling of just trying to become a more efficient business that over time, we started the season benefits. And so within that other cost of revenue, you've got cloud costs and streaming delivery costs, you've got customer service, you've got payment fees. So some of those just improve with scale. Some of those improve with becoming more efficient and being smart about how you run your business.

Paul Vogel: And so, you know, we're always going to look for ways to optimize and become more and more efficient in those areas. But yes, that's part of some of the improvements you've seen is again, just that greater focus on efficiency and making sure that our overall gross margins are improving. Obviously, the largest percentage of our gross margins has to do with the roads as we pay to all of our different right-feld holders. But other costs of revenue is material and we do focus on it and it has been something that's improved throughout the year.

Maria Rips: All right, and we've got time for one more question. And that's going to come from Maria Rips on AI. It seems like across the space, generative AI-powered tools are improving advertiser-creative and leading to better KPI performance. Is Spotify investing in generative AI to improve its products for advertisers? And if so, are you seeing any tangible improvements in ad performance? Yeah, so there are plenty of things we're doing generally speaking to AI and machine learning to improve our advertising products.

Maria Rips: Everything from improving, of course, targeting and so forth. But as you're speaking to generative AI specifically, I think the biggest single thing we could do and that we're experimenting with and the teams are experimenting with is enabling more opportunities for advertisers creative to be created. So, let me expand on that for a moment. So if you think about our advertising format relative to say many others, it lives in this kind of nice segue on the one end where it is not as easy to produce as pect ads, what you see on other platforms.

Maria Rips: And it's obviously not as hard to produce as a video ad. And so we think there's an enormous opportunity for us to apply generative AI to create really compelling audio advertisements for marketeers. And today, creating a great audio ad is something that's quite costly and quite expensive for marketeers to do. They obviously already make that investment when it comes to video because there's plenty of platforms that are available. But we're one of the few that offers audio ads in a big way on the scale that we're doing.

Maria Rips: So that's definitely a bit of a hurdle getting advertisers on there. So what generative AI has to promise to do is, of course, to allow for that creative cost to come down. But not only that, but it allows you to scale that creative in unimaginable ways. So you can translate whatever creative you had to do lots of different languages. You can use the same voice actor, but instead of producing one or two ads, you can have a thousand or ten thousand or even a hundred thousand ads.

Maria Rips: They're individually created to each user that gets to hear this. So there's lots of possibilities that lowers the barrier to entry for marketeers on the ad side using generative AI. And of course, there's also lots of opportunities of creating more compelling ads, which means that will perform better for marketeers as well. So we're really excited about it.

Daniel Ek: But the levels that this is the early days and we are definitely experimenting with the teams on how to do that and I think it can be a real catalyst for our ads business going forward, but again to caution everyone it is early days and planning more will happen in this space to bring costs down further and increase quality further just throughout the explosion of all the tools from OpenAI to Google's tools to Lama and all the other things that are happening across the ecosystem so this is not just Spotify but it's the entire ecosystem that's driving this development further but I think we have a unique opportunity in our ad product to bring to bear something where you will of course see generative video ads but I think that's a little bit further into the future than seeing generative audio ads in a big way so we're excited about being able to bring that to market hopefully you know relatively soon and then flying a big part in 2024 and beyond great thanks Maria and that's going to conclude our Q&A session on today's call and so with that I'll I'm going to hand the floor back over to Daniel for some closing remarks all right well thank you Bryan so in closing as you can see we're feeling very good about the progress and results so lots of the actions we've taken over the last 12 months are really bearing fruits and I feel very confident that we are a well on our way of being both a great product and a great business so thank you again for joining us and as usual please feel free to check out our for the record podcast dropping later today okay 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 I was recruited into an MLM by someone who convinced me that we were friends because she saw herself in me she played on my emotions knowing I wanted to leave the military and told me to put the kit cost on my credit card because she could train me to earn it back fast forward a few months and despite doing everything she coached me to do I was exhausted in losing money it got so bad financially that I quit with loads of credit card debt and that friend she told me that I gave up blocked me and never spoke to me again Janice former MLM rep in early 2014 by all accounts my life was pretty great I had a supportive spouse beautiful kids and a comfortable life and yet something felt like it was missing I couldn't quite put my finger on it after our last child was born I remember thinking what's next despite being busy with five kids I felt like I had to be doing more was being a stay at home mom enough I looked around at other moms who worked from home or worked full time and thought how do they do it and they probably looked at me and asked the same thing did anyone actually have it figured out why did we all feel like we should be doing more I felt like a martyr most days and I knew I wasn't alone. In many ways, women have internalized the idea that we must do it all, while also taking on the brunt of housework, child care, and the emotional and mental labor of managing a household full of different people with varying needs, all at our own expense.

Daniel Ek: I tried many coping mechanisms to fill the void, wine, other people, over scheduling myself, but I always ended up feeling less than alone and isolated. That was until I found what could be the solution to all my problems, a business in a box. Babe, I left Rowan's blanket downstairs. Can you grab it when you come up? I'm snuggling with my two-year-old, crammed into a toddler bed where I end up falling asleep many nights, much to the chagrin of my aching back, but not tonight.

Daniel Ek: Tonight, I'll be meeting a friend I haven't seen in almost 20 years, okay, friend is a bit of a stretch. That is from my hometown and we went to the same high school, but we're never close. In fact, I'm pretty sure we've never spoken. She was a few years younger than me in school and quiet, but always very sweet. She branded me on Facebook a while back and I happily accepted. Back then, Facebook was still pretty new and a fun place for sharing pics of kids with people you hadn't seen in 10 years.

Daniel Ek: Instead of the minefield of ads, sales, politics, misinformation, and anxiety driven by bizarre algorithms that it is today. So getting friend requests from past acquaintances wasn't out of the ordinary, the good old days. A few weeks prior, Becky had reached out via messenger and told me she'd be in Seattle for a work trip. She'd asked if I'd like to get wine during her visit. An in-real-life visit from a human woman, a night out away from my kids, truly she had me at wine. I said yes without- I said no.

Unknown Executive: I said no.