Q1 2024 Spotify Technology SA Earnings Call and Q&A
Please wait the conference will begin shortly.
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Krista: Thank you for standing by my name is Krista and I'll be your conference operator today at this time I would like to welcome everyone to the Spotify first quarter 'twenty 'twenty four earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.
Speaker Change: If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press Star one. Thank you I would now like to turn the conference over to <unk>.
Speaker Change: Brian Goldberg head of Investor Relations at Spotify, Brian you may begin.
Bryan Daniel Goldberg: Thanks, operator, and welcome to Spotify as first quarter 2024 earnings conference call joining us today will be Daniel <unk>, our CEO and Ben <unk>, our interim CFO and VP of financial planning and analysis, we will start with opening comments from Daniel and then afterwards, we'll be happy to answer your questions questions can be submitted by going to slide <unk> Dot Com S. L. I D O dot.
Bryan Daniel Goldberg: Calm and using the code hashtag Spotify earnings Q1, 'twenty four analysts can ask questions directly in the slide out when 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 we will add in your question before we begin let me quickly cover the safe Harbor during this call, we'll be making certain forward looking.
Bryan Daniel Goldberg: Statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ because of factors discussed on today's call in our shareholder deck and in filings with the Securities and Exchange Commission. During this call. We'll also refer to certain non <unk> financial measures reconciliations between.
Bryan Daniel Goldberg: Our <unk> and non <unk> financial measures can be found in our shareholder deck in the financial section of our Investor Relations website and also furnished today on form 6K, and with that I'll turn it over to Daniel.
Daniel: Alright, Thanks, Brian and Hey, everyone and thanks for joining us.
Daniel: I hope you've had the opportunity to review our shareholder deck. Overall this was a solid quarter driven by strong revenue growth expanding gross margin and the largest operating income we've ever posted.
Daniel: Our performance speaks to what I covered last quarter. When I described our outlook for 2024, a year of solid progress with monetization and resourcefulness taking center stage.
Daniel: But let's discuss our EMEA growth this quarter, we missed our target due to a bit of a slowdown at the start of the year. So I want to directly address the three main factors contributing to this outcome and how we're adjusting over the next few quarters first the Mou and subscription growth we achieved in 2023, not only surpassed our most ambitious.
Daniel: Forecast, but also set a record for the most significant user growth and Spotify history. While we anticipate continued robust growth going forward 2023, with a truly standout year and should not be a baseline expectation for every subsequent year.
Daniel: Another significant challenge was the impact of our December workforce reduction, although there's no question that it was the right strategic decision. It did disrupt our day to day operations more than we anticipate it took us some time to find our footing, but more than four months into this transition I think we're back on track I expect to continue improving.
Daniel: Our execution throughout the year getting us to an even better place than we've ever been.
Daniel: The third issue is related to marketing spend in hindsight, we probably pulled back too significantly throughout 2023 and as such we're already correcting. This as we move into Q2 to be clear, we're not going to go back to what we were doing before we still continue to expect improving profitability over the course of this year and into.
Daniel: The next and the new funds are being directed towards acquiring and reactivating high value users will enhance our base with their deeper engagement and loyalty we expect to see good improvements in the second half of this year and are confident in our ability to deliver top of the funnel growth at consistently high levels, maintaining our proven track record.
Speaker Change: So how do we expect this to impact our business in the coming months.
Speaker Change: Well at Spotify, we don't rely on a single growth strategy, but rather adjust our focus based on what the business to mats for instance, two years ago, we really concentrated on our user growth than last year, we restructured our costs and now we're focused on accelerating revenue while improving our <unk>.
Speaker Change: Line next year, our focus may return to the top of the following user growth, but in the near term monetization remains our top priority bottom line, we're really good at pivoting our attention when it makes sense when I say pivot I really mean, making tweaks that will get us to even better outcome and because of our ability to do there.
Speaker Change: This I have no doubt that we will be able to recapture top of the funnel growth over time as it becomes more of a focus area for the team and.
Speaker Change: Before I turn it over to Ben to provide more detail into the numbers I also want to mention our new CFO Kristian Louie.
Speaker Change: I've worked with Christian directly and I can tell you firsthand that he is a terrific leader and excel so driving both operational efficiency and growth. He has an impressive track record and his expertise will be incredibly valuable as we continue on this path I look forward to you getting to know him. When he joins later this year, but I also want to extend.
Speaker Change: A huge thank you to Ben for stepping into the role of interim CFO and helping to ensure a smooth transition.
Speaker Change: 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 Q.
Speaker Change: Q1 marked a strong start to the year led by accelerating revenue growth and record setting profitability as our focus on monetization and efficiency have begun flowing through our financials, although miu variability was greater than expected. Our funnel continues to expand at a reasonably healthy rate within the context of the last few years as total <unk> grew nine.
Speaker Change: 17% year on year in Q1 coming off of 2020 threes record performance while quarter on quarter net additions of $13 million were in line with 2021 and 2022 levels on the subscription front. The business grew in line with our guidance, adding 3 million net new subscribers total revenue grew 21% year on year on a constant.
Speaker Change: Currency basis to $3 6 billion euro representing 100 basis points of growth improvement relative to Q4, notably our recent price increases and improving product mix shifts accelerated premium ARPA growth to 7% year on year on a currency neutral basis, while our advertising business saw improved currency neutral growth.
Speaker Change: Of 19% year on year versus Q4, 17%.
Speaker Change: Moving to profitability, we are very encouraged by the business is early stage inflection towards the targets. We laid out for you at our 2022 Investor Day gross margin came in at a Q1 record of 27, 6%, surpassing guidance by 121 basis points and resulting in our first ever 1 billion Euro plus gross <unk>.
Speaker Change: Great quarter as Youre, well aware there are many components that can move our gross margin in Q1s performance was primarily driven by content cost favorability among other smaller movements opt.
Speaker Change: Operating income of $168 million Euro also set a new record aided by gross profit strengths and lower operating expenses operating income was impacted by $82 million Euro and social charge accruals, which were $74 million higher than our forecast driven by share price appreciation during the quarter as a reminder, we don't foresee.
Speaker Change: Cash share price movements and our outlook for the business since they are outside of our control.
Speaker Change: Finally free cash flow was a positive $207 million in euro in the quarter performance here reflected the expected reversal of some of the timing benefits. We saw in Q4, we remain confident that we have entered a new chapter in terms of expanding the business as cash generation potential.
Speaker Change: Looking ahead to second quarter guidance, we are forecasting $631 million Mou and.
Speaker Change: <unk> of $16 million from Q1, and 245 million subscribers, an increase of 6 million over Q1. We are also forecasting a currency neutral revenue growth rate of over 22% year on year to.
The $3 8 billion Euro in total revenue. We also anticipated gross margin of 28, 1% and an operating income of 250 million Euro.
Speaker Change: In terms of our user growth outlook as Daniel mentioned, we've made some adjustments to further optimize our marketing activity and expect improving <unk> net add levels over the course of the year.
With respect to price increases and subscriber growth in Q2, our data shows the historical price increases have had minimal impacts on growth. However, much like Q3 of last year, we are baking in some modest levels of churn into our Q2 outlook. Additionally, we anticipate another quarter of sequential improvement in <unk> growth on a constant currency.
Speaker Change: Basis in Q2, similar to the 200 basis points of improvement we saw from Q4 to Q1.
From a profitability standpoint, we continue to expect a sequential ramp in gross margin through the balance of 2024 as well as improvements in operating income and operating margin with that I'll hand things back to Brian for Q&A.
Bryan Daniel Goldberg: Alright, Thanks, Ben and again, if you've got any questions. Please go to slide O Dot Com hashtag Spotify earnings Q1, 'twenty four we will be reading the questions in the order they appear in the queue with respect to help people vote up their preference for questions.
Bryan Daniel Goldberg: And our first question today is going to come from.
Speaker Change: <unk> on music profitability.
Speaker Change: Stability can you please give us some detail on the improved music profitability in the quarter, which marketplace product was the key driver behind better margins and how much of extra costs did audio books at.
Speaker Change: Alright, I'll start and maybe bad and you can you can add to the answer so I think.
Speaker Change: Maybe to up level, the answer a little bit and talk about gross margin in general.
Speaker Change: This was a real outperformance.
Speaker Change: On many levels and there are many things that contributed to that so you mentioned marketplace marketplace did really well in the quarter and it continues to.
Bad: Have a great position or really all of our marketplace products growing nicely. So I feel really good about marketplace and that was a big contributor in.
Bad: In addition to that obviously on the gross margin side, we saw lower non music costs.
Bad: That was aided by <unk>.
Bad: Both our audio book side, but also on a podcasting side last year. If you remember that was a bit of a drag on our gross margin and this year, we expect profitability for the podcast segments. So that's adding to that.
Bad: Also you saw lower streaming delivery cost and overall cost sort of other cost of revenues.
Bad: Due to some of that sort of resourcefulness and that culture.
Bad: From my side. It is really a new Spotify youre seeing where we are being relentless the resourceful and all of our costs.
Bad: And then driving an improvement in efficiency on all our different drivers that are adding up to this gross.
Bad: Gross margin.
Bad: Number.
Yes.
Speaker Change: You covered it well Daniel I think I would just add that.
Speaker Change: The resourcefulness that you highlight is spanning a diversified set of levers that are all adding up to this narrative. So I think it's really sort of pirate across many cylinders for our business.
Speaker Change: Alright, our second question is also going to come from Scott.
Scott: <unk> royalties for the bundled music and audio book plans, our royalty payments for each category based on a fixed allocation of relative value of music versus audio book plans or is it based on the actual share of consumption I E would increased audiobook consumption reduce music royalty.
Scott: Thanks I'll take this one I think this is a great question and we won't be able to get into the specifics here, but I think you are touching upon a very important important point that I'll try to up level towards its a fairly complex machine across our content types and we do have a concept that al referred to of shifting profit pools now so across our content types with all types of cost models.
We've got variable once so that could be anything from revenue shares per user models per hour models. We also have fixed cost models. It's a fairly complex machine and the concept of bundling things together allows us to tap into a strength of ours, which is leaning into this complexity across profit pools and managing it efficiently as we look to meet and serve customer demands where we see it.
Speaker Change: So I think it's as simple as that.
Speaker Change: Alright. Our next question is going to come from Justin Patterson on cap allocation, Daniel the balance sheets in a solid position and you could be approaching over 2 billion in free cash flow in 2025.
Justin Patterson: Given this how will you and incoming CFO Kristian really got look to reevaluate your capital allocation policy.
Daniel: Yes, I do appreciate the question Justin.
Certainly a new type of problem for Spotify to be dealing with.
Speaker Change: I think it's a little bit too early to draw any.
Speaker Change: Sort of a real decisions yet on our side and obviously Christian Hasnt started yet, but this will be honest table.
Speaker Change: To look at and to work with myself and the board around what we do I do want to note two.
Speaker Change: Investors, though that we do have the upcoming convert so thats certainly one use of capital we could use <unk>.
Speaker Change: Into the future, but we are.
Speaker Change: Many many tools at our disposal. So we look forward to discussing those.
Speaker Change: Year progresses.
Speaker Change: Alright, and a follow up question for Justin This time on product Daniel appear to be shipping product at a faster rate. How do you view this as sustaining the 20% plus revenue growth rate over time and do you believe the improved product capabilities can make you less reliant on marketing overtime.
Speaker Change: Yes.
Speaker Change: Youre exactly right Justin we are focused on shipping more product and better product for consumers and the way you should think about this as investors.
Justin Patterson: The better we can improve the product to more people engaged with our product and the more value. We ultimately creates and the more value. We create the more ability. We will have to then capture some of that value by price increases. So I've mentioned this concept concept before but we're really really focused as a company on this value to price ratio and the way we're thinking.
Justin Patterson: About it is we're constantly trying to improve the value we offer to consumers and every now and then we look at that sort of value to price ratio and try to capture some of that value through price increases and when we do not only spotify benefits, but the entire creative ecosystem benefits too and Thats obviously.
Justin Patterson: Everything from artists and songwriters to authors and podcast is now.
Justin Patterson: Part of this.
Justin Patterson: <unk>.
Justin Patterson: Bundled so to speak where everyone sort of all that.
Justin Patterson: The rising tide helps all boats so to speak so.
Justin Patterson: Long term you should definitely say that the better the product is of course, the less reliance we will be on marketing because the more <unk>.
Justin Patterson: <unk> the product will be and of course the less.
Justin Patterson: We have to reactivate consumers to come back to the service as well.
Justin Patterson: Alright. Our next question is going to come from rich Greenfield on audiobooks.
Rich Greenfield: Theres been speculation that you will launch a premium tier that excludes audiobooks for $10 99, while the audiobooks goes to $11 99, Im curious if thats needed to improve the cost structure of your audio book offering could you help us understand the margin profile of the audio books business, Yeah, I'll start here and maybe Ben can can add so rich.
Speaker Change: I think my last answer kind of captures this what we're focused on that Spotify is really we're trying to improve as much value as we can and over the course now the last two years, we've added a tremendous amount of value. We've added of course, more and more podcasts than ever before millions of podcasts now.
Speaker Change: A library of over 100 million music tracks now onto the service we've added audio books in many markets.
Speaker Change: More than 25% of our base are now using that and tier two I think I saw something.
Speaker Change: Online, where you were talking about whether or not people were engaging.
Speaker Change: Of that 25.
Speaker Change: Percent of users.
Speaker Change: While we are in.
Speaker Change: The first 14 days of new users using audio books, we see over two and half hours of incremental usage on the audio book side. So we're seeing some great results.
Speaker Change: And of course, we've added video to both on the music side, but also on the podcasting side. So we're adding a tremendous amount of value over the course really of this last two years on the service and more and more product features like AIG da de lists and so on so we're adding more value across the base and we're focused on capture.
Speaker Change: Some of that value, we've been adding over the past two years bye bye.
Speaker Change: Increasing the price and obviously youre mentioning the U S numbers, but in many territories, we have been doing even more price increases sometimes that's due to.
Speaker Change: Local dynamics, sometimes that's also due to inflation and other things that are contributing to so it's really a mix of many different things that we're considering as we're raising prices, but the main one if I want to focus on one it's really around value to price ratio and keeping that very healthy where we're obviously off.
Speaker Change: <unk> a lot more value to consumers than what we're capturing through the price increases, but I feel really good about us doing that and that's also why you saw us having a healthy guidance on the subs number two because we think consumers like what theyre seeing from Spotify, they loved the offering and they feel that the value that they're getting us more.
Speaker Change: That's fair.
Speaker Change: Alright. Our next question is going to come from Doug Anmuth, an Mou could you.
Doug Anmuth: Talk more about the greater Mou variability you saw in the first quarter was moderated marketing activity as expected or campaigns less effective at the top of the funnel.
Does organizational change just reflect increased discipline and higher LTV to Sac thresholds.
Doug Anmuth: Where does that ratio versus historical levels.
Mou: Absolutely I'll take that and I'll start with it and maybe Dan you can add if you have any any other thoughts I think it's important to first start.
Speaker Change: My answer here with just a bit of look that context. So we started honing in on marketing efficiency as we enter 2023, so more than a year ago, and we began pulling back on spend last year. We had other tailwind is working for us that more than counteracted. This and drove a record year for us. So these included product changes and innovations that we made as well.
Speaker Change: Benefits on the competition side.
Speaker Change: With certain competitors sort of exiting different markets.
Speaker Change: Also had a super strong end of year effort with activities, such as wraps and our campaigns around the holiday and the new period. So all these things sort of contributed to what otherwise was observed as the variability on Q1.
Speaker Change: That said, we've had some great learnings and insights from this performance, notably as we've talked about sort of it and as Daniel mentioned thinking about sort of our marketing spend and how we how we calibrate that I think youre right to call out that we are very focused on sort of a high LTV to CAC threshold, but we also want to make sure that were sort of capturing all the opportunity.
Speaker Change: Under sort of the.
Speaker Change: The investment curve that we have in different markets and I think it's important to sort of strike that balance and making sure we capture the opportunity while staying disciplined in making sure that we're focused in the way we target high value users across the board.
Speaker Change: Alright next question is from Justin Patterson on Education, Daniel could you. Please frame the opportunity you see in education, how would you characterize the investment to succeed here versus what you had to invest in podcasts and audiobooks, what would cause you to expand beyond the UK.
Daniel: Yes, I mean this is very very early days for those of you that may not know we've rolled out.
Daniel: In early test in the UK, where we have an educational offering for consumers.
Daniel: Long term education remains obviously, a huge potential opportunity for Spotify, but it's too early to say what the results.
Daniel: Of the specific test that we have.
Daniel: But as many things with Spotify, maybe to up level, a little bit is that.
Daniel: Oftentimes, we either see consumers or creators tapping into a need and quite often what ends up happening is that.
Daniel: Our creators.
Daniel: Our using our platforms for things that we may not have the initially.
Daniel: <unk> so.
Daniel: While ago, we added the ability to have certain podcast behind the paywall and what we were seeing was that some of these podcast, we're actually having courses available.
Daniel: For them. So that you can consume that and unlock them via Spotify, which is a great use case now the problem of that obviously is that this has been a far.
Daniel: Then really great user experience for our consumers. So people are hacking our system in a positive way to do more things on it and this is exactly how audiobooks started for US too. So audiobooks started in Germany for us where the music labels had a bunch of audiobook rights and were uploading. These audio back Bookstar platform and they started seeing great.
Daniel: <unk> success and similarly on education, we've started seeing how people are using Spotify for educational purposes, and what we're trying to do now is obviously create a much more compelling consumer experience a force that education, and we're adding more tools that allows these educators to communicate not just via audio but also via video.
Daniel: And adding more and more ways for them to engage in that way and I think long term, if you squint and see that education remains a massive opportunity.
Daniel: And the internet should be poised to create.
Daniel: Paralleled user experience, where some of the world's best educators and creators storytellers should be able to help lots of consumers. So what you can see if you're a consumer in the U K at the moment at sorry, It is youre going to see lots of of really cool ways, where.
Daniel: As you can learn how to become a better deejay using spotify or learn how to play the guitar and some really amazing content. That's on there by creators a lot of these creators we're already doing podcast and Theyre now, adding ways to monetize their fans.
By creating amazing content that allows them to get better at their craft.
Daniel: And I think that is the trend in education.
Daniel: You guys know this but more and more consumers.
Daniel: Consumers are relating to other people they are not necessarily related to face less brands and so this is a huge trend in education that we're very excited about.
Daniel: Alright. Our next question is going to come from Mike Morris on pricing recent press indicates that you've raised price in the U K and Australia and are planning to do so in the US Later this year can you provide an update on pricing changes for this year, how will you approach pricing increases by plan and unique pricing for audio book.
Daniel: <unk> our other premium features.
Speaker Change: Yes, I'll start and maybe Ben can add.
Speaker Change: We don't pre announce anything we're doing on the.
Speaker Change: Any particular type of price increases, but as I said the general thinking if you want to understand how we're thinking is it is really about value to price ratio. So we're constantly looking at how much value, we're adding our consumers in that market responding to that value that we're adding and then.
Speaker Change: What is the fair price to have a good value to price ratio.
Speaker Change: And we're doing this in multiple ways of course, one is adding value into this based here, but the other way is to increasing the choice for consumers. So I did want to point to that a little bit more here. So you've seen us over the years to add more ways for consumers to choose different plants and Spotify and it originally started off by.
Speaker Change: By being sort of.
Speaker Change: Just a single person plan and then went to a family plan and then we added duo and then we added various ways of paying for these family plans and for instance, Southeast Asian markets, where you can have a day pass the week passed and so on so there's just a lot more flexibility than you should think about.
Krista: Thank you for standing by. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Spotify First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Krista: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Bryan Goldberg, Head of Investor Relations at Spotify. Bryan, you may begin.
Speaker Change: That we want to offer as much flexibility as possible in this next stage of Spotify to now because we are at a size, where we want to appeal to an even larger base of consumers to turn to one of our subscription offerings. So that obviously means that youll see things like <unk>.
Bryan Daniel Goldberg: Thanks, operator, and welcome to Spotify's first quarter 2024 earnings conference call. Joining us today will be Daniel Ek, our CEO, and Ben Kung, our interim CFO and VP of financial planning and analysis. We'll start with opening comments from Daniel and Ben, and afterwards, we'll be happy to answer your questions. Questions can be submitted by going to slido.com, S-L-I-D-O.com, and using the code hashtag SpotifyEarningsQ124. 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 InvestorRelations at ir at Spotify.com, and we'll add your question.
Speaker Change: Instance, the audio book only tier that.
Speaker Change: Referenced earlier here you should also expect to see a music only tier.
Speaker Change: Well.
Speaker Change: And all of this is in line to just offer as much flexibility to consumers as possible for them to pick whatever plan. They feel offers the best value to price ratio for them.
Speaker Change: Okay next question will be from Benjamin Black.
Benjamin Black: Gross margins there was a big step up in gross margin in the quarter and for the second quarter outlook were there any one timers or is this a new trend how should we think about the cadence of gross margin expansion for the balance of the year.
Bryan Daniel Goldberg: 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 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-IFRS financial measures.
Bryan Daniel Goldberg: Reconciliations 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 on Form 6K. And with that, I'll turn it over to Daniel. All right.
Benjamin Black: Thanks, Dan. This is a great question I'll start just by re emphasizing what we've been saying a few quarters in a row now we feel really confident about the gross margin trajectory in the sequential momentum we have so consider this a real trend and not just a function of one offs as I said in my prepared remarks, we have a lot of moving parts as is the case every quarter non music.
Benjamin Black: Music marketplace to name a few of the major areas. We also had movements in other cost of revenue such as continued favorability with cloud costs as Daniel mentioned, so there are a bunch of things driving the upside from a year on year perspective, it's the continuation of the trends we talked about last quarter that I mentioned to music improvements driven by the growth of our marketplace business, our continuing pivot.
Daniel G. Ek: All right. Thanks, Bryan. And hey, everyone, and thanks for joining us. I hope you've had the opportunity to review our shareholder deck. Overall, this was a solid quarter driven by strong revenue growth, expanding gross margin, and the largest operating income we've ever posted. Our performance speaks to what I covered last quarter when I described our outlook for 2024, a year of solid progress with monetization and resourcefulness taking center stage. But let's discuss our MEU growth this quarter.
Profitability in podcast seeing and also optimizing other cost of revenues for Q2, we see momentum from these same areas areas persisting.
Speaker Change: Okay, and we've got another question from Doug MF.
Doug Anmuth: On Investor Day goals, you, often say that Spotify is well positioned to deliver on the 2022 investor day goals, but the company has changed a lot. Since then where the changes that you've made and the newfound discipline required to actually deliver those goals or should you now have real upside because spotify is being run very differently.
Daniel G. Ek: We missed our target due to a bit of a slowdown at the start of the year. So I want to directly address the three main factors contributing to this outcome and how we're adjusting over the next few quarters. First, the MEU and subscription growth we achieved in 2023 not only surpassed our most ambitious forecast but also set a record for the most significant user growth in Spotify's history. While we anticipate continuous, robust growth going forward, 2023 was a truly standout year and should not be based on expectations for every subsequent year. Another significant challenge was the impact of our December workforce reduction.
Doug Anmuth: Yeah I mean.
One of the things we talked about that Spotify is obviously this changes the only constant.
Doug Anmuth: Sort of mantra have internally. So that we are changing is not perhaps something U S. Investors should be all that surprised about because that's the only thing we pride ourselves internally.
Doug Anmuth: And you can see that in some of my opening remarks, two about sort of how we pivot focus.
Daniel G. Ek: Although there's no question that it was the right strategic decision, it did disrupt our day-to-day operations more than we anticipated. It took us some time to find our footing, but more than four months into this transition, I think we're back on track. I expect to continue improving on our execution throughout the year, getting us to an even better place than we've ever been.
Doug Anmuth: Internally as well, but I think maybe to set the context on the 2022 Investor day, the $22 two investor day wasn't as much backward looking as it was forward looking so what we tried to do that is to outline where we're going with the company and some of those things.
Doug Anmuth: We used both internally and externally pretty much at the same time to kind of set the directions for the team and in there we talked about the Spotify machine.
Doug Anmuth: And the Spotify that machine being that this isn't just a sort of a one trick pony anymore, but it is actually multiple verticals working together to provide a consistent.
Daniel G. Ek: In hindsight, we probably pulled back too significantly throughout 2023. And as such, we're already correcting this as we move into Q2. To be clear, we're not going to go back to what we were doing before. But we still continue to expect improving profitability over the course of this year and into the next. Any new funds are being directed towards acquiring and reactivating high-value users who enhance our base with their deeper engagement and loyalty.
Doug Anmuth: The story around just more and more choice for consumers that drives more and more engagement because you may come for the music and stay for the Audi books, and some consumers may come for the podcast and stay for the audio books. So this is just going to be more ways for people to interact with it in the machine takes care of all the complexity on the back end to deal.
Daniel G. Ek: We expect to see good improvements in the second half of this year and are confident in our ability to deliver top of the funnel growth at consistently high levels, maintaining our proven track record. So how do we expect this to impact our business in the coming months?
Doug Anmuth: With.
Doug Anmuth: What was historically, a very difficult problem to solve which is multiple business models and one consumer experience.
Doug Anmuth: So that's the sort of key arc of what Youre seeing contributing to this story now specifically related to the resourcefulness I do agree that we've made are harder pivot to that than we probably initially planned but if you walk back to some of our comments, we did say that 2022 with an investment year.
Daniel G. Ek: Well, at Spotify, we don't rely on a single growth strategy but rather adjust our focus based on what the business demands. For instance, two years ago, we really concentrated on user growth. Last year, we restructured our costs, and now we're focused on accelerating revenue while improving our bottom line. Next year, our focus may return to top-of-the-funnel user growth, but in the near term, monetization remains our top priority. Bottom line, we are really good at pivoting our attention when it makes sense. When I say pivot, I really mean making tweaks that will get us an even better outcome.
Doug Anmuth: And then we also.
Doug Anmuth: Would go back eventually to focus on something else, obviously that was a harder pivots in 2023 than we initially planned to do.
Doug Anmuth: I think that served us well, but I would say, it's really in the 80 20 storey 80% is pretty much the same but we're actually delivering on all the things we said in 2022 and 20% is.
Doug Anmuth: There may be some added upside by us just being a more resourceful company.
Daniel G. Ek: And because of our ability to do this, I have no doubt that we will be able to recapture top of the funnel growth over time as it becomes more of a focus area for the team. And before I turn it over to Ben to provide more detail on the numbers, I also want to mention our new CFO, Christian Luiga. I've worked with Christian directly, and I can tell you firsthand that he's a terrific leader and excels at driving both operational efficiency and growth.
Doug Anmuth: And.
Doug Anmuth: I'm certainly surprised in a positive way bye bye.
Doug Anmuth: Resilience and the resourcefulness that the teams are showing some line items like.
Doug Anmuth: Marketing and.
Doug Anmuth: Cost of delivery.
Doug Anmuth: Just to mention two examples.
Doug Anmuth: So I think we can be a better company than even what I said in 2022, but I think.
Daniel G. Ek: He has an impressive track record, and his expertise will be incredibly valuable as we continue on this path. I look forward to you getting to know him when he joins us later this year. But I also want to extend a huge thank you to Ben for stepping into the role of interim CFO and helping to ensure a smooth transition.
Doug Anmuth: Shouldn't see this as something very different than what we outline is pretty much the same but hopefully with a little bit crisper execution on it.
Doug Anmuth: Got a question from rich Greenfield on ticked up with the U S government set to band Tictoc barring court intervention.
Ben Kung: Thanks, Daniel. And thanks, everyone, for joining us.
Doug Anmuth: How are you thinking about the opening that can create a music discovery and short form content tied to music.
Doug Anmuth: Yes.
Ben Kung: 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. Q1 marked a strong start to the year, led by accelerating revenue growth and record-setting profitability as our focus on monetization and efficiency began flowing through our financial system. Although MAU variability was greater than expected, our funnel continued to expand at a reasonably healthy rate within the context of the last few years, as total MAU grew 19% year-on-year in Q1, coming off of 2023's record performance, while quarter-on-quarter net additions of $13 million were in line with 2021 and 2022 levels. On the subscription front, the business grew in line with our guidance, adding 3 million net new subscribers
Doug Anmuth: I'm not going to comment on other companies.
Doug Anmuth: <unk> related.
Doug Anmuth: <unk> strategy of what may happen with their regulatory proceedings, but obviously, what I can say is that.
Doug Anmuth: What we are focused on winning discovery and.
Doug Anmuth: We're going to add as many ways that we can to improve the discovery of Spotify. So you saw us in the quarter add music videos.
Doug Anmuth: C music clips in a bigger way.
Doug Anmuth: Already today, if you open up the apps and you start seeing more and more videos on the music side, where artists are engaging with fans those.
Ben Kung: Total revenue grew 21% year-on-year on a constant currency basis to 3.6 billion euros, representing 100 basis points of growth improvement relative to Q4. Notably, our recent price increases in improving product mix shift accelerated premium ARPU growth to 7% year-on-year on a currency neutral basis, while our advertising business saw improved currency neutral growth of 19% year-on-year versus Q4 17%. Moving to profitability, we are very encouraged by the business's early stage inflection towards the targets we laid out for you at our 2022 Investor Day.
Doug Anmuth: In a similar way like our <unk> product that takes Hawk did a few years ago. So I think the whole industry.
Doug Anmuth: Take talking to other companies have obviously.
Doug Anmuth: Improved the user experience that we're all as an industry learning about these.
Doug Anmuth: Trends in best practices and trying to improve our products. So that's what great competition does.
Doug Anmuth: Helps improve for everyone and of course, we are not.
Doug Anmuth: Any different than anyone else in that we're trying to learn from the marketplace. We learn what consumers like we try to improve upon it and make the best possible user experience. So short form music content is a big focus of ours.
Ben Kung: Gross margin came in at a Q1 record of 27.6%, surpassing guidance by 121 basis points and resulting in our first ever 1 billion euro plus gross profit quarter. As you're well aware, there are many components that can move our gross margin, and Q1's performance was primarily driven by content cost favorability among other smaller movements. Operating income of 168 million euros also set a new record, aided by gross profit strength and lower operating expenses.
Doug Anmuth: Youre going to see more video on the music side make its way into the product in 2024 and two other things by the way that Youre going to see is of course, more AI products and the music side as well and in addition to that.
Doug Anmuth: I believe youre going to see an even more global music ecosystem than any time before in history. So we're excited about all these sort of three core trends in music.
Ben Kung: Operating income was impacted by 82 million euros in social charge accruals, which were 74 million euros higher than our forecast, driven by share price appreciation during the quarter. As a reminder, we don't forecast share price movements in our outlook for the business since they are outside of our control. Finally, free cash flow was a positive 207 million euros in the quarter.
Speaker Change: Alright got it.
Rich Greenfield: A follow up from rich rich Greenfield on.
Rich Greenfield: Topline growth Daniel in the short video you created on the quarter you sounded very pleased with the 20% revenue growth rate premium has been the key driver aided by price increases.
Rich Greenfield: I'm curious how should we be thinking about advertising growth going forward can it start to increase your overall growth rate and grow 20% plus.
Bryan Daniel Goldberg: Performance here reflected the expected reversal of some of the timing benefits we saw in Q4. However, we remain confident that we've entered a new chapter in terms of expanding the business's cash generation potential. Looking ahead to second quarter guidance, we are forecasting 631 million MAU, an increase of 16 million from Q1, and 245 million subscribers, an increase of 6 million over Q1. We are also forecasting a currency-neutral revenue growth rate of over 22% year on year, pointing to 3.8 billion euros in total revenue.
Rich Greenfield: Yes.
Speaker Change: Youre right.
Speaker Change: Our premium product.
Speaker Change: The big driver of the quarter and we felt really good about that.
Speaker Change: And Ben can add to this but we saw a lot of strength in the quarter as well as it relates to advertising.
Ben: I think it's a little bit early to say on my side, how the macro on the advertising side will develop but.
Ben: I remain cautiously optimistic that we're seeing some really good growth.
Bryan Daniel Goldberg: We also anticipate a gross margin of 28.1% and an operating income of 250 million euros. In terms of our user growth outlook, as Daniel mentioned, we've made some adjustments to further optimize our marketing activity and expect improving MAU net ad levels over the course of the year. With respect to price increases and subscriber growth in Q2, our data shows that historical price increases have had minimal impacts on growth. However, much like Q3 of last year, we are baking in some modest levels of churn into our Q2 outlook.
Speaker Change: But again just to remind investors. The reality is even if advertising will become better part of the story, it's still a relatively small part of our overall revenue mix. So anything we can do on our subscription side, we'll obviously materially outperform any improvement on the outside so I don't think I'm not excited about advertising.
Speaker Change: But it just happens to be that.
Subscription side, obviously, it's the bigger part in order to get to the 20% revenue growth did I Miss anything Ben Yes, I think I would just add that even in the most recent quarter adds was just shy of the 20% Mark. So we are getting quite close to sort of.
Bryan Daniel Goldberg: Additionally, we anticipate another quarter of sequential improvement in ARPU growth on a constant currency basis in Q2, similar to the 200 basis points of improvement we saw from Q4 to Q1. From a profitability standpoint, we continue to expect a sequential ramp-up in gross margin through the balance of 2024, as well as improvements in operating income and operating margin. With that, I'll hand things back to Bryan for Q&A.
Ben: Kind of almost parity growth rates between the two segments I would just say that sort of in the near term. We continue to see strong growth in supply and monetize more impressions. So we're just very focused on making sure we're optimizing across all channels to meet the growing demand as budgets continue to unlock sequentially each quarter.
Bryan Daniel Goldberg: All right. Thanks, Ben.
Ben: Okay I've got a question now from Benjamin Black on.
Benjamin Black: Universal Music group.
Could you talk a little bit about your expanded relationship with Universal Music group that was announced this quarter what are the key benefits for you and where could we see the biggest impact to the financial model.
Daniel G. Ek: And again, if you've got any questions, please go to slido.com using the hashtag SpotifyEarningsQ124. We'll be reading the questions in the order they appear in the queue with respect to how people vote up their preference for questions. And our first question today is going to come from Agnieszka Pustula on music profitability. Can you please give us some detail on the improved music profitability in the quarter, which marketplace product was the key driver behind better margins, and how much of an extra cost did audiobooks add?
Benjamin Black: Yes.
Speaker Change: Generally speaking we are always just to set expectations, where we're always.
Speaker Change: Sort of working with our partners across all different content mixes and of course, the major labels too and a huge part of what we're trying to do is operationally improve and allowing us for more flexibility to work together and that means to allow the teams on the various side too.
Daniel G. Ek: All right, I'll start and maybe Ben can add to the answers. So I think maybe to level up the answer a little bit and talk about gross margin in general. The, this was a real off performance on many levels, and there were many things that contributed to that. So you mentioned marketplace marketplace did really well in the quarter and continues to have a great position on really all of our marketplace products growing nicely.
Speaker Change: Give us more opportunities to experiment on the platform with.
Speaker Change: With Reits and so a way of showcasing that is really for instance around the music videos that now are in I believe 11 or 12 markets.
Daniel G. Ek: So I feel really good about marketplace, and that was a big contributor. In addition to that, obviously, on the gross margin side, we saw lower non-music costs. Some of that was aided by both our audiobook side and our podcasting side last year. If you remember, that was a bit of a drag on our gross margin, and this year we expect profitability for the podcast segment, so that's adding to that.
Speaker Change: The world. So that's a great way of just showing how.
Speaker Change: We worked with our label partners across the board.
Speaker Change: Also going to see music clips show up in a bigger way where artists are using waste of short form storytelling video too.
Speaker Change: Tell the story around their album or.
Speaker Change: Tell fans about our new album dropped that they should be pre savings. So there's lots and lots of innovation that's happening together with our label partners and artists alike, and USG is obviously, a very important partners to us just as the other major labels and independent labels.
Daniel G. Ek: Also, you saw lower streaming delivery costs and overall costs and sort of other costs of revenues due to some of that sort of resourcefulness and that culture. So I think, from my side, it is really a new Spotify you're seeing where we are relentlessly resourceful with all of our costs and then driving improvements in efficiency on all our different drivers that are adding up to this gross margin number.
Speaker Change: Two and I think long term the way to think about that from a financial impact point of view.
Speaker Change: It's really the more we can improve engagement the more value, we're creating the more ability. We will have eventually to capture some of that value through price increases or more inventory that then drives.
Ben Kung: I think you covered it well, Daniel. I think I would just add that the resourcefulness that you highlight is spanning a diversified set of levers that are all adding up to this narrative. So I think it's really sort of firing on all cylinders for our business.
Speaker Change: Advertising, which of course is to the benefit not just of Spotify, but is the benefit of the entire creative community.
Speaker Change: Alright, our next question is going to come from rich Greenfield.
Bryan Daniel Goldberg: All right. Our second question is also going to come from Agnieszka.
Rich Greenfield: On music royalty rates.
Rich Greenfield: Does the recent launch of an audio book $9 99 unlimited.
Daniel G. Ek: This time on royalties. For the bundled music and audiobook plans, are royalty payments for each category based on a fixed allocation of the relative value of music versus audiobook plans, or is it based on the actual share of consumption, i.e., would increased audiobook consumption reduce music royalties?
Rich Greenfield: Unlimited product impact your statutory music royalty rates wire publishers concerned.
Spotify representative: Yes, I mean, so first I talked about this but a huge part in this next phase of Spotify is really to allow for more flexibility for consumers. So we went from a single plan.
Ben Kung: Thanks, I'll take this one. I think this is a great question. We won't be able to get into the specifics here, but I think you are touching upon a very important point that I'll try to raise. It's a fairly complex machine across our content types, and we do have a concept that I'll refer to as shifting profit pools now. So across our content types, we have all types of cost models; we've got variable ones.
Ben Kung: Thanks, I'll take it.
Spotify representative: 90, 999 to nine back in the day to them improving family plans that then adding due to them having.
Spotify representative: Pricing weak pricing in certain markets.
Spotify representative: And now Youre seeing it already book only tier and you're going to see eventually a music only tier two.
Ben Kung: So that could be anything from revenue shares per user models per hour models. We also have fixed cost models. It's a fairly complex machine. And the concept of bundling things together allows us to tap into a strength of ours, which is leaning into this complexity across profit pools and managing it efficiently as we look to meet and serve customer demands where we see them. So I think it's as simple as that.
Spotify representative: So that's on the specific around the offering side, you will see a lot more.
Spotify representative: Sort of tiers that allows for more flexibility to consumers to opt into the type of deal that they believe offers the greatest value for them in terms of how they are using Spotify now specifically to our content partners, while I won't comment on any specifics what I would say is that of course this is the sort.
Daniel G. Ek: All right, our next question is going to come from Justin Patterson on capital allocation. Daniel, the balance sheet's in a solid position, and you could be approaching over $2 billion in free cash flow in 2025. Given this, how will you and incoming CFO Christian Luiga look to reevaluate your capital allocation policy?
Spotify representative: A natural tension between.
Spotify representative: Suppliers and distributors theres always attention around payments now to level set. This we did are loud and clear a while ago, but I think it's important to note that Spotify in 2023 had record payouts to the entire creative community and global publishing revenue will hit a record.
Daniel G. Ek: Yeah, I do appreciate the question, Justin, and it's certainly a new type of problem for Spotify to be dealing with. But I think it's a little bit too early to draw any sort of real decisions yet on our side. And obviously Christian hasn't started yet, but this will be on his table to look at and work with myself and the board around what we do. I do want to note to investors, though, that we do have the upcoming Convert. So that's certainly one use of capital we could use in the future. But we have many, many tools at our disposal. So we look forward to discussing those issues as the year progresses.
Spotify representative: Hit a record for 2023, and we will pay even more in 2024, so I feel really good about where we are relative to our partners and the fact that we are growing the creator ecosystem and that still remains our goal and I feel good about delivering on that goal. Two so yes of course, there is always going to be tension between.
Spotify representative: That's sort of supplier distributor thing, but I would say we.
Spotify representative: We are on track for a better 2024 for song writers and publishers. So I feel good about delivering lots and lots of value and relative to the CD era published.
Daniel G. Ek: All right, and another follow-up question for Justin. This time on product. Daniel, you appear to be shipping product at a faster rate. How do you view this as sustaining the 20% plus revenue growth rate over time? And do you believe the improved product capabilities can make you less reliant on marketing over time?
Spotify representative: Publishers and song writers are fair way better than the streaming economies I feel good about that.
Speaker Change: Okay. Our next question is going to come from Jessica Reif Ehrlich on advertising.
Daniel G. Ek: Yeah, I mean, you're exactly right, Justin; we are focused on shipping more product and a better product for consumers. And the way you should think about this, as investors, is the better we can improve the product, the more people engage with our product, and the more value we ultimately create. And the more value we create, the more ability we will have to then capture some of that value through price increases. So I've mentioned this concept before, but we're really, really focused as a company on this value to price ratio.
Daniel G. Ek: Yeah, I mean, you're exactly
Speaker Change: Past quarter, the trade desk called audio a key area of growth for their business programmatic advertising is currently a small part of your business can you provide some color on the growth opportunity in programmatic and advertising in general.
Speaker Change: Thanks, Jessica its a great question.
Speaker Change: We believe as you sort of framed in your question that programmatic is a growing and important part of the mix and we're bullish on this channel long term.
Speaker Change: It is an opportunity really for all to participate small mid large sized enterprises and businesses across the board.
Daniel G. Ek: And the way we're thinking about it is we're constantly trying to improve the value we offer to consumers. And every now and then, we look at that sort of value to price ratio and try to capture some of that value through price increases. And when we do, not only Spotify benefits, but the entire creative ecosystem benefits too. So obviously, you know, everything from artists and songwriters to authors and podcasters now that are part of this strength, or this bundle, so to speak, where everyone sort of helps all boats, so to speak.
Speaker Change: As Daniel mentioned kind of in a prior answer is still the smaller part of our mix and as you call out in your in your question programmatic is also a small part of that smaller portion.
Speaker Change: Right now as I said in my prior answer related to advertising, we just continue to sort of focus on optimizing across all formats and delivery channels to meet the opportunity where it is.
Speaker Change: In terms of near term opportunity again very focused on 2024, we continue to watch closely but are encouraged by what we're seeing is advertiser budgets unlocking sequentially each quarter and we've got some good macro trends momentum heading into the summer in the second half with global events like the euros Olympics amongst others.
Daniel G. Ek: So, long term, you should definitely say that the better the product is, of course, the less reliant we will be on marketing because the more viral the product will be. And, of course, the less we have to reactivate consumers to come back to the service as well.
Speaker Change: Great. Okay, we actually have time for one more question and Thats going to be a follow up from Jessica Reif Ehrlich.
Speaker Change: And Christian Luger.
Speaker Change: You recently announced Christian as your new CFO, Daniel what in particular about Christians capabilities or skill set do you think will be most additive to Spotify and what will Christians top priorities be when he joins the company.
Daniel G. Ek: All right, our next question is going to come from Rich Greenfield on audiobooks. There's been speculation that you will launch a premium tier that excludes audiobooks for 1099 while the other books go to $11.99. I'm curious if that's needed to improve the cost structure of your audiobook offering. Could you help us understand the margin profile of the audiobook business? Yeah, I'll start here and maybe Ben can...
Speaker Change: Yes.
Speaker Change: So I've.
Speaker Change: Actually seen Christian firsthand for quite some time, just as a sort of fun anecdote. So Christian was part of the team at <unk> that made the Spotify investments in 2015, so he's very familiar with the company.
Daniel G. Ek: Yeah, I'll start here, and maybe Ben can add something. So Rich, I think my sort of last answer kind of captures this.
Daniel G. Ek: What we're focused on at Spotify is really trying to improve as much value as we can. And over the course of the last two years, we've added a tremendous amount of value. We've added, of course, more and more podcasts than ever before, millions of podcasts now. We have a library of over 100 million music tracks now on the service. We've added audiobooks to many markets. More than 25 percent of our base are now using them.
Speaker Change: And myself and Martin Lawrence and the other co founder of Spotify, So we know Christian quite well.
Speaker Change: And it's been fun to follow his progress from a far obviously, yet to tally up saundra and then going to <unk>.
Speaker Change: <unk>.
Speaker Change: Tackling different industries, but kind of always with the consistent great track record and Thats a track record of improving the bottom line, but at the same time be very very focused on driving a much better business even on the top line too and I think thats the sort of key thing that got me and the rest of the team to be excited about him too because.
Daniel G. Ek: And two, I think I saw something online where you were talking about whether or not people were engaging with that 25 percent of users. Well, in the first 14 days of new users using audiobooks, we see over two and a half hours of incremental usage on the audiobook side.
Speaker Change: This is a person who has been at many different industries and seen many different things and this is not just someone who is focused on optimizing on the bottom line by cutting costs, but actually someone who is focused on.
Daniel G. Ek: So we're seeing some great results. And, of course, we've added video to both on the music side and also on the podcasting side. So we're adding a tremendous amount of value over the course, really, of these last two years on the service and more and more product features like AI DJ, Daylist, and so on. So we're adding more value across the base, and we're focused on capturing some of that value we've been adding over the past two years by increasing the price. And obviously, you're mentioning the U.S. numbers, but in many territories, we have been doing even more price increases. Sometimes that's due to local dynamics.
Speaker Change: Whats right for the business, even on the top line too.
Speaker Change: And that feels like the right fit for us. So we're very excited about that and really the top priorities as it comes in.
Speaker Change: To be focused on together with the team on.
Speaker Change: Driving even further improvements.
Speaker Change: Being resourceful that is our sort of key mantra, we think we still have more ways to go when it comes to that.
Daniel G. Ek: Sometimes that's also due to inflation and other things that are contributing to it. So it's really a mix of many different things that we're considering as we're raising prices. But the main one, if I want to focus on one, it's really around the value to price ratio and keeping that very healthy where we're obviously offering a lot more value to consumers than what we're capturing through price increases. But I feel really good about us doing that.
Speaker Change: Excited about that.
Speaker Change: And then.
Speaker Change: One of the questions here alluded to sort of capital allocation. So I'm sure that will be one of his top priorities together with myself and the team too.
Speaker Change: So we're excited about it but yes, he is going to be.
Speaker Change: In addition, I think to the team and I look forward to all of you guys meeting him.
Speaker Change: Well.
Speaker Change: Alright, great. So that's going to conclude our Q&A session. Today, thanks, everyone for the questions.
Daniel G. Ek: That's also why you saw us having healthy guidance on the subscriptions number two, because we think consumers like what they're seeing from Spotify. They love the offering, and they feel that the value that they're getting is more than fair.
Speaker Change: And.
Speaker Change: Now I'd like to turn the call back over to Daniel for some closing remarks, alright, well thanks, Brian.
Daniel: We've talked about 2020 for the year of monetization and I think we're really delivering on that ambition now as we've shifted the focus on strong revenue growth and margin expansion, we see a clear opportunity to ensure we're also continuing to grow the top of our funnel I feel good about the changes, we're implementing and remain very confident.
Ben Kung: All right, our next question is going to come from Doug Anmuth on MAU. Can you talk more about the greater MAU variability you saw in the first quarter? Was moderated marketing activity as expected, or were campaigns less effective at the top of the funnel? And does organizational change just reflect increased discipline and higher LTV to SAC thresholds? Where's that ratio versus the historical level? Unknown Speaker I'll take that, and I'll
And in our ability to reach the ambitious plans we've outlined so thanks, everyone for joining us and I look forward to speaking to you.
Daniel: Next quarter.
Speaker Change: Okay, Great 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.
Ben Kung: I'll take that, and I'll start with it, and maybe Daniel, you can add if you have any other thoughts. I think it's important to first start my answer here with just a bit of a context. So we started honing in on marketing efficiency as we entered 2023, so more than a year ago. And when we began pulling back on spend last year, we had other tailwinds working for us that more than counteracted this and drove the record year for us.
Speaker Change: This concludes today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Ben Kung: So these included product changes and innovations that we made, as well as benefits on the competition side with certain competitors sort of exiting different markets. We also had a super strong end of year effort with activities such as wrapped and our campaigns around the holiday in the new period. So all these things sort of contributed to what otherwise was observed as the variability in Q1.
Speaker Change: Okay.
Sure.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: And.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Ben Kung: That said, we've had some great learnings and insights from this performance, particularly, as we've talked about sort of in, as Daniel mentioned, thinking about sort of our marketing spend and how we how we calibrate that. I think you're right to call out that we are very focused on sort of a high LTV to CAC threshold. But we also want to make sure that we're sort of capturing all the opportunity under sort of the investment curve that we have in different markets.
Speaker Change: Yeah.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: [music].
Ben Kung: And I think it's important to sort of strike that balance and make sure we capture the opportunity while staying disciplined and making sure that we're focused in the way we target high-value users across the board.
Daniel G. Ek: All right, next question from Justin Patterson on education. Daniel, could you please frame the opportunity you see in education? How would you characterize the investment to succeed here versus what you had to invest in podcasts and audiobooks? What would cause you to expand beyond the UK? Yeah, I mean,
Daniel G. Ek: Yeah, I mean, this is very, very early days. For those of you that may not know, we've rolled out an early test in the UK, where we have an educational offering for consumers. Long-term education remains obviously a huge potential opportunity for Spotify, but it's too early to say what the result is of the specific test that we have. But as with many things with Spotify, maybe to level it up a little bit, we often see consumers or creators tapping into a need.
Daniel G. Ek: And quite often, what ends up happening is that creators are using our platforms for things that we may not have initially intended them for. So a long while ago, we added the ability to have certain podcasts behind a paywall.
Daniel G. Ek: And what we were seeing was that some of these podcasts were actually having courses available for them so that you can consume them and unlock them via Spotify, which is a great use case. Now, the problem with that, obviously, is that this has not been a really great user experience for consumers. So people are hacking our system in a positive way to do more things on it. And this is exactly how audiobooks started for us, too. So audiobooks started in Germany for us, where the music labels had a bunch of audiobook rights and were uploading these audiobooks onto our platform, and they started seeing great consumer success.
Daniel G. Ek: And similarly, in education, we've started seeing how people are using Spotify for educational purposes, and what we're trying to do now is obviously create a much more compelling consumer experience for that. And we're adding more tools that allow these educators to communicate not just via audio but also via video and adding more and more ways for them to engage in that way. And I think, long term, if you squint and see that, education remains a massive opportunity.
Daniel G. Ek: And the Internet should be poised to create an unparalleled user experience, where some of the world's best educators and creators and storytellers should be able to help lots of consumers. So what you can see if you're a consumer in the UK at the moment, at the start, you're going to see lots of really cool ways where, for instance, you can learn how to become a better DJ using Spotify or learn how to play the guitar.
Daniel G. Ek: It's some really amazing content that's on there by creators. And a lot of these creators were already doing podcasts, and they're now adding ways to monetize their fans by creating amazing content that allows them to get better at their craft. And I think that is the trend in education. You guys know this, but more and more consumers are relating to other people; they're not necessarily related to faceless brands. And so this is a huge trend in education that we're very excited about.
Daniel G. Ek: All right, our next question is going to come from Mike Morris on pricing. Recent press indicates that you've raised prices in the UK and Australia and are planning to do so in the U.S. later this year. Can you provide an update on pricing changes for this year? How will you approach pricing increases by plan and unique pricing for audiobooks or other premium features?
Daniel G. Ek: Yeah, I'll start, and maybe Ben can add. We don't pre-announce anything we're doing on any particular type of price increase, but as I said, the general thinking, if you want to understand how we think, it is really about the value to price ratio. So we're constantly looking at how much value we're adding, our consumers in that market responding to that value that we're adding, and then what is the fair price to have a good value to price ratio.
Daniel G. Ek: And we're doing this in multiple ways, of course. One is adding value to this base tier. But the other way is to increase the choice for consumers. So I do want to point that out a little bit more here.
Daniel G. Ek: So you've seen us over the years add more ways for consumers to choose different plans on Spotify. And it originally started off as sort of just a single person plan, and then it went to a family plan, and then we added Duo.
Daniel G. Ek: And then we added various ways of paying for these family plans in, for instance, Southeast Asian markets, where you can have a day pass, a week pass, and so on. So, just a lot more flexibility. And you should think about that we want to offer as much flexibility as possible in this next stage of Spotify because we're at the point where we want to appeal to an even larger base of consumers to turn to one of our subscription offerings.
Daniel G. Ek: So that obviously means that you'll see things like, for instance, the audiobook-only tier that was referenced earlier here. You should also expect to see a music-only tier as well. All of this is in line to just offer as much flexibility to consumers as possible for them to pick whatever plan they feel offers the best value to price ratio for them.
Ben Kung: Okay, the next question will be from Benjamin Black on Gross Margin. There was a big step up in gross margin in the quarter and for the second quarter outlook. Were there any one-timer surprises, or is this a new trend? How should we think about the cadence of gross margin expansion for the balance of the year? Thanks.
Ben Kung: Thanks, Ben. This is a great question.
Ben Kung: I'll start just by re-emphasizing what we've been saying for a few quarters in a row now. We feel really confident about the gross margin trajectory and the sequential momentum we have, so consider this a real trend and not just a function of one-offs. As I said in my prepared remarks, we have a lot of moving parts, as is the case every quarter. Non-music, music, marketplace, to name a few of the major areas.
Ben Kung: We also had movements in other costs of revenue, such as continued favorability with cloud costs, as Daniel mentioned, so there are a bunch of things driving the upside. From a year-on-year perspective, it's the continuation of the trends we talked about last quarter, too. Music improvements driven by the growth of our marketplace business, our continuing pivot to profitability in podcasting, and also optimizing other costs of revenues. For Q2, we see momentum from these same areas consistently.
Ben Kung: Okay, we've got another question from Doug Ameth on the Investor Day goals. You often say that Spotify is well positioned to deliver on the 2022 Investor Day goals, but the company has changed a lot since then. Were the changes that you've made and the newfound discipline required to actually deliver those goals, or should you now have real upside because Spotify is being run very differently?
Daniel G. Ek: Yeah, I mean, one of the things we talked about at Spotify is that change is the only constant. It's a sort of mantra I have internally.
Daniel G. Ek: So that we're changing is not perhaps something you as investors should be all that surprised about, because that's the only thing we pride ourselves internally on. And you can see that in some of my opening remarks too, about sort of how we pivot our focus internally as well. But I think maybe to set context on the 2022 investor day, the 2022 investor day wasn't as much backward looking as it was forward looking.
Daniel G. Ek: So what we tried to do then was to outline where we were going with the company, and some of those things we used both internally and externally, pretty much at the same time, to kind of set the direction for the team. And in that, we talked about the Spotify machine. And the Spotify machine being that this isn't just a sort of one-trick pony anymore, but it is actually multiple verticals working together to provide a consistent story around just more and more choice for consumers that drives more and more engagement. Because, you know, you may come for the music and stay for the podcasts, and some consumers may come for the podcasts and stay for the audiobooks.
Daniel G. Ek: So this is just going to be more ways for people to interact with it, and the machine takes care of all the complexity on the back end to deal with, you know, what was historically a very difficult problem to solve, which is multiple business models in one consumer experience.
Daniel G. Ek: And so that's the sort of key arc of what you're seeing contributing to this story. Now, specifically related to resourcefulness, I do agree that we've made a harder pivot to that than we probably initially planned. But if you go back to some of our comments, we did say that 2022 was an investment year and that we would go back eventually to focus on something else. Obviously, that was a harder pivot in 2023 than we initially planned to do.
Daniel G. Ek: And I think that's served us well. But I would say it's really an 80-20 story. 80% is pretty much the same, but we're actually delivering on all the things we said in 2022. And 20%, there may be some added upside by us just being a more resourceful company. And, you know, I'm certainly surprised in a positive way by the resilience and the resourcefulness that the teams are showing on some line items like, you know, marketing and cost of delivery, just to mention two examples.
Daniel G. Ek: So I think we can be a better company than even what I said in 2022. But I think you shouldn't see this as something very different from what we outline. It is pretty much the same, but hopefully with a little bit more crisp execution on it.
Daniel G. Ek: Got a question from Rich Greenfield on TikTok. Would the U.S. government be set to ban TikTok barring court intervention? How are you thinking about the opening that could create a music discovery platform and short form content tied to music? Yeah.
Daniel G. Ek: Yeah, I'm not going to comment on other companies and related to their strategy or what may happen with their regulatory proceedings. But obviously, what I can say is that, you know, we are focused on winning discovery. And we're going to add as many ways that we can to improve discovery on Spotify. So you saw us add music videos last quarter. You're going to see music clips in a bigger way.
Daniel G. Ek: You can already today, if you open up the apps, start seeing more and more videos on the music side where artists are engaging with fans in a similar way, like a Reels product that TikTok did a few years ago. So I think the whole industry, you know, TikTok and other companies have obviously improved the user experience so that we're all as an industry learning about these trends and best practices and trying to improve our products. So that's what great competition does. It helps improve things for everyone.
Daniel G. Ek: And of course, we are not any different than anyone else in that we're trying to learn from the marketplace; we learn what consumers like, we try to improve upon it, and we make the best possible user experience. So short form music content is a big focus of ours. You're going to see more video on the music side make its way into the product in 2024. And two other things, by the way, that you're going to see are, of course, more AI products on the music side as well. And in addition to that, I believe you're going to see an even more global music ecosystem than any time before in history. So we're excited about all these sort of three core trends in music.
Daniel G. Ek: All right, we've got a follow-up from Rich, Rich Greenfield on top line growth. Daniel, in the short video you created on the quarter, you sounded very pleased with your 20% revenue growth rate. Premium has been the key driver, aided by price increases. Curious, how should we be thinking about advertising growth going forward? Can it start to increase your overall growth rate and grow 20% plus?
Daniel G. Ek: Yeah, you're right that our premium product was sort of the big driver of the quarter, and we felt really good about that. And Ben can add to this, but we saw a lot of strength in the quarter as well as it relates to advertising. You know, I think it's a little bit early to say on my side how the macro on the advertising side will develop, but I remain cautiously optimistic that we're seeing some really good growth.
Daniel G. Ek: But again, just to remind investors, the reality is even if advertising will become a better part of the story, it's still a relatively small part of our overall revenue mix. So anything we can do on the subscription side will obviously materially outperform any improvement on the ad side. So don't think I'm not excited about advertising, but it just happens to be that the subscription side obviously is the bigger part in order to get to the 20% revenue growth. Did I miss anything, Ben?
Ben Kung: Yeah, I think I would just add.
Ben Kung: Yeah, I think I would just add that even in the most recent quarter, you know, ads were just shy of the 20% mark. So we are getting quite close to sort of a kind of almost parity growth rates between the two segments. I would just say that, sort of, in the near term, we continue to see strong growth in supply and monetizable impressions. So we're just very focused on making sure we're optimizing across all channels to meet the growing demand as budgets continue to unlock sequentially each quarter.
Ben Kung: Okay, we've got a question now from Benjamin Black on Universal Music Group. Could you talk a little bit about your expanded relationship with Universal Music Group that was announced this quarter? What are the key benefits for you, and where could we see the biggest impact to the financial model?
Daniel G. Ek: Yeah, I mean, generally speaking, we're always, just to set expectations, working with our partners across all different content mixes, and of course, the major labels too. And a huge part of what we're trying to do is operationally improve and allow us more flexibility to work together. And that means allowing the teams on the various sides to, you know, give more opportunities to experiment on the platform with rights.
Daniel G. Ek: Yeah, I mean,
Daniel G. Ek: And so a way of showcasing that is really, for instance, around the music videos that are now in, I believe, 11 or 12 markets around the world. So that's a great way of just showing how, you know, we work with our label partners across the board. You're also going to see music clips show up in a bigger way, where artists are using short form storytelling on video to, you know, tell a story around their album or, you know, tell fans about a new album drop that they should be pre-saving.
Daniel G. Ek: So there's lots and lots of innovation that's happening together with our label partners and artists alike. And UMG is obviously a very important partner to us, just as the other major labels and independent labels are too. And I think, long term, the way to think about that from a financial impact point of view is really the more we can improve engagement, the more value we're creating, the more ability we will have eventually to capture some of that value through price increases or more inventory that then drives advertising, which, of course, is to the benefit not just of Spotify but of the entire creative community.
Daniel G. Ek: All right, our next question is going to come from Rich Greenfield on music royalty rates. How does the recent launch of an audiobook $9.99 Unlimited product impact your statutory music royalty rates? Why are publishers concerned?
Daniel G. Ek: Yeah, I mean, first of all, I talked about this, but a huge part in this next phase of Spotify is really to allow for more flexibility for consumers. So we went from a single plan, $9.99 back in the day, to then improving family plans, to then adding Duo, to then having day pricing, and week pricing in certain markets. And now you're seeing an audiobook only tier, and you're going to see eventually a music only tier too.
Daniel G. Ek: So that's on the specific side of the offering; you will see a lot more tiers that allow for more flexibility for consumers to opt into the type of deal that they believe offers the greatest value for them in terms of how they're using Spotify. Now, specifically to our content partners, while I won't comment on any specifics, what I would say is that, of course, this is the sort of natural tension between suppliers and distributors. There's always a tension around payments.
Daniel G. Ek: Now, to level set this, we did our loud and clear a while ago, but I think it's important to note that Spotify in 2023 will pay record payouts to the entire creative community, and global publishing revenue will hit a record for 2023. And we will pay even more in 2024. So I feel really good about where we are relative to our partners and the fact that we are growing the creator ecosystem.
Daniel G. Ek: And that still remains our goal, and I feel good about delivering on that goal too. So, yeah, of course, there's always going to be tension between that sort of supplier-distribution thing, but I would say we are on track for a better 2024 for songwriters and publishers. So I feel good about delivering lots and lots of value. And relative to the CD era, publishers and songwriters are faring way better in this streaming economy, so I feel good about that.
Ben Kung: Okay, our next question is going to come from Jessica Reef Ehrlich on advertising. This past quarter, the trade desk called audio a key area of growth for their business. Programmatic advertising is currently a small part of your business. Can you provide some color on the growth opportunities in programmatic and advertising in general?
Ben Kung: Thanks, Jessica. It's a great question. We believe, as you sort of framed in your question, that programmatic is a growing and important part of the mix, and we're bullish on this channel for the long term. It's an opportunity really for all to participate, small, mid, and large-sized enterprises and businesses across the board. As Daniel mentioned, kind of in a prior answer, you know, ads are still the smaller part of our mix. And as you call out in your question, you know, programmatic is also a small part of that smaller portion.
Ben Kung: Thanks, Jessica.
Ben Kung: Right now, as I said in my prior answer related to advertising, we just continue to sort of focus on optimizing across all formats and delivery channels to meet the opportunity where it is. In terms of near-term opportunity, again, very focused on 2024, we continue to watch closely but are encouraged by what we're seeing as advertiser budgets unlocking sequentially each quarter. And we've got some good macro trends momentum heading into the summer in the second half with global events like the Euros, Olympics, amongst others.
Ben Kung: Great. Okay, we actually have time for one more question. And that's going to be a follow-up from Jessica Reif, Erlich.
Daniel G. Ek: I'm Christian Lugo. You recently announced Christian as your new CFO. Daniel, what in particular about Christian's capabilities or skill set do you think will be most additive to Spotify, and what will Christian's top priorities be when he joins the company?
Daniel G. Ek: Yeah, so I've actually seen Christian firsthand for quite some time, just as a sort of fun anecdote. Christian was part of the team at Telia Sonora that made the Spotify investment in 2015. So he's very familiar with the company and me and Martin Lawrence and the other co-founder of Spotify. So we know Christian quite well, and it's been fun to follow his progress from afar, obviously at Telia Sonora and then going to Saab, tackling different industries, but kind of always with a consistent great track record.
Daniel G. Ek: And that's a track record of improving the bottom line, but at the same time, being very, very focused on driving a much better business, even on the top line, too. And I think that's the sort of key thing that got me and the rest of the team to be excited about him, too, because this is a person who's been in many different industries and seen many different things. And this is not just someone who's focused on optimizing the bottom line by cutting costs, but actually someone who's focused on what's right for the business, even on the top line, too, to be focused on together with the team on driving even further improvements in being resourceful.
Daniel G. Ek: That is our sort of key mantra. We think we still have more ways to go when it comes to that, so we're excited about that. And then, you know, one of the questions here alluded to sort of capital allocation.
Daniel G. Ek: So I'm sure that will be one of his top priorities, together with myself and the team, too. So we're excited about it. But yeah, he's going to be a great addition, I think, to the team. And I look forward to all of you guys meeting him as well.
Daniel G. Ek: Great. So that's going to conclude our Q&A session today. Thanks, everyone, for the questions. And now I'd like to turn the call back over to Daniel for some closing remarks.
Daniel G. Ek: All right. Well, thanks, Bryan.
Daniel G. Ek: We've talked about 2024 as the year of monetization, and I think we're really delivering on that ambition. Now, as we've shifted the focus on strong revenue growth and margin expansion, we see a clear opportunity to ensure we're also continuing to grow the top of our funnel. I feel good about the changes we're implementing and remain very confident in our ability to reach the ambitious plans we've outlined. So thanks, everyone, for joining us, and I look forward to speaking to you next quarter.
Bryan Daniel Goldberg: Okay, great, that concludes today's call. A replay will be available on our website and also on the Spotify app under the Spotify earnings call replays.
Krista: Thank you everyone for joining. This concludes today's conference call. Thank you for your participation, and you may now disconnect. Please wait, the conference will begin shortly.
Krista: This concludes today's conference call. Thank you for your participation, and you may now disconnect. Please wait; the next conference will begin shortly.