Good morning and welcome to Spotify's Fourth Quarter 2023 Earnings Call and Webcast. All participants are in a listen-only mode. As a reminder, this conference call is being recorded. I would now like to turn the call over to Bryan Goldberg, Head of Investor Relations. Thank you. Please go ahead.

All right. Thanks, operator, and welcome to Spotify's fourth quarter 2023 earnings conference call. Joining us today will be Daniel Ek, our CEO; Paul Vogel, our CFO; and Ben Kung, our VP of Financial Planning and Analysis, who has been assisting with the transition while we search for our new 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, S-L-I-D-O.com, and using the code #SpotifyEarningsQ423. 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 [email protected] and we'll add in your question. Before we begin, let me quickly cover the Safe Harbor. During this call, we'll be making certain forward-looking statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed on today's 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. 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 furnished today on Form 6-K. And with that, I'll turn it over to Daniel.

All right. Thanks, Bryan, and hey, everyone, and thanks for joining us. I hope you've had the opportunity to review our shareholder deck to get a sense of what an incredible year 2023 was for Spotify. Throughout the year, we notched some really significant milestones and set numerous records. This included 113 million net additions on the MAU side and premium net additions of 31 million, both the biggest full-year additions in our history. Our annual Wrapped experience also toppled previous levels of engagement, surpassing 2022 numbers in just the first 31 hours of the campaign. We accomplished all of this by significantly exceeding our own expectations when we entered the year and against the backdrop of global turmoil and uncertainty, and Q4 was a continuation of the story. While I'm pleased with the level of growth we saw in 2023, perhaps what is even more gratifying is that it also marked a very different year for Spotify, a true evolution in how we operate our company—a year where we started to prove that we're not just a company that has an amazing product but one that is also building a great business. There is no question that we had to make some difficult decisions to put us on track to achieve our goal of being a consistently profitable company. By taking these steps, I'm super confident about where we're heading. Looking into 2024, you should expect a continuation of what you saw in 2023: strong product development, which leads to strong growth, but with an increased focus on monetization and efficiency, which in turn drives profitability. I know some of you may start to wonder if we're sacrificing growth for profitability. Long-term, we believe that the real value of Spotify is in solving problems at the intersection between creators and consumers. With scale, there will be even more opportunities to do so. Therefore, growth is still the most important thing we can deliver. However, equally true is that our hurdle rate for investment has increased. So, what gives? As I've shared before, we have various levers to pull at different times to drive revenue growth. These include growing our users, creating new businesses with new revenue streams, and increasing revenue per user through price increases. In 2023, we leveraged all three throughout the year at various times, but this won't always be the case. Expect to see a shift back and forth among prioritizing these three key elements based on various considerations. Looking ahead, I believe 2024 is going to be another year of solid progress, led by an acceleration of revenue growth. That said, it is important to remind investors that we constantly modulate what we spend the most time focusing on. In some years, it's focusing on growing the top of the funnel, and in some years, it's about driving monetization of those users. The last few years has been extraordinary from the top-of-the-funnel perspective. Our aim is to continue this trend, but our focus in 2024 is more on how we monetize that growth. I also wanted to provide a quick update on our audiobooks business, which is performing well and we are very excited about its potential. It's still early days, but the feedback from listeners and from the industry is extremely encouraging. Data shows that our entry into this market has dramatically accelerated its overall growth. In Q4, we became the number two provider of audiobooks behind Audible, which is notable given how entrenched the legacy players are. This is exactly what we set out to do: grow the pie for the publishing industry and expand the interest in audiobooks to an entirely new set of listeners. More to come as this takes hold and we roll it out to additional markets. Before I turn it over to Paul to provide more details on the numbers, I also wanted to take this opportunity with all of you on the line to thank him and wish him well. Although Paul is sticking around for a couple more months, this will be his last earnings call. He's been a great partner and helped to solidify the position of the strength that we sit in today. Thank you, Paul, for these years. I also wanted to give you a quick update on our CFO search. We are well underway, and I'm happy with the caliber of the candidates that I’m seeing. As we enter this next phase of focusing on having both a great product and building a great business, I'm confident we will find the right person—someone who is passionate about driving the levels of efficiency and resourcefulness that are critical to our long-term success. Paul, thanks again, and over to you.

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. Q4 is a very strong quarter. MAU grew by 28 million to 602 million and we added 10 million net subscribers, finishing at 236 million. Both MAU and subscriber growth continued to be above our historical trend and outperformed forecast. Revenue grew 16% year-over-year to EUR3.7 billion during the quarter. Excluding the effects of unfavorable currency movements, revenue grew 20% year-on-year, representing an acceleration of 300 basis points versus the prior quarter's result, due to the ongoing effects of the new subscription pricing. Turning to gross margin. Gross margin of 26.7% was above guidance by about 10 basis points, due primarily to favorability in our podcast business. We reported an operating loss of EUR75 million, which was better than guidance due mainly to lower-than-expected marketing spend and personnel-related costs. As we previously disclosed, our operating loss was impacted by about EUR143 million of charges related to the efficiency actions we announced in December. Excluding the one-time charges, we generated EUR68 million of adjusted operating profit, which is more than double the third quarter as the business continued its early-stage inflection towards sustainable growth and profitability. Finally, free cash flow was positive EUR396 million in Q4. While some of the strength was timing related, we remain confident that we have entered a new chapter in terms of expanding the business, and the business's cash generation potential. Looking ahead to the first quarter guidance, we are forecasting 618 million MAU, an increase of 16 million from Q4 and 230 million subscribers, an increase of 3 million over Q4. We're also forecasting a currency-neutral revenue growth rate of 20% plus year-on-year, pointing to EUR3.6 billion in total revenue. We also anticipate a gross margin of 26.4% and an operating profit of EUR180 million. While we no longer give full year guidance, we do expect healthy full year 2024 user growth that should be close to the average of the last few years, and we expect strong subscriber growth as well. Gross margin and operating margin are both expected to improve throughout the year to deliver meaningful full-year expansion with podcasting expected to deliver positive gross profit for the year. We also expect our free cash flow generation to meaningfully exceed what we generated in 2023. Finally, as Bryan mentioned, Ben Kung, who has been a trusted partner of mine in Finance, is also on the call and we're joining us for Q&A. Additionally, I'd like to thank Daniel and all of my colleagues over the past eight years for making my time at Spotify truly special. With that, I'll hand things back to Bryan for Q&A.

All right. Thanks, Paul. Again, if you've got any questions, please go to slido.com, #SpotifyEarningsQ423. 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. Our first question is going to come today from Doug Anmuth on podcasting. Have podcasts flipped into positive gross profit yet? And how do you think about inflection here through '24 as you're rationalizing content spending?

Yes, I'll take this one, Doug. To level set with everyone, when we had our Investor Day last year, everyone was probably expecting our podcast business to be a net adder to the business and probably thought that the music margins were worse than what they ended up being. As we outlined then, podcasting was a drag on the business, but something we were committed to turn around. I'm pleased to say in Q4, we were very close to breakeven on that business, which gives me a lot of confidence that as we get into 2024, we will achieve the full year profitability target on podcasting. When you think about the drivers for that to happen, it is really twofold. On the top line side, we're still seeing healthy growth in engagement. That engagement translates into more opportunities for us to monetize those engagement hours, and that's the top line. On the bottom line, we've doubled down on the deals that worked, and throughout 2023, we've exited a lot of the deals that didn't work. That is the result you're now seeing with the close to breakeven, which will lead to a positive podcasting business in 2024.

All right. Our next question is going to come from Michael Morris on margins. What are the most impactful steps that will help you progress towards your long-term music gross margin goal of 30% to 35%? Can you share more detail on the gross margin levers in 2024 and the relative impact you anticipate from each?

Great question, Michael. In terms of the progress on the music margin goals, we see a lot of potential in the growth of our marketplace products as we continue to focus on driving adoption of those and adding value to our label partners and therefore building upon the progress that we've already made to date in that area. In terms of 2024, the story can be broken into three parts. It’s a continuation of the journey on profitability and podcasting, the continuation of marketplace growth, as I mentioned, and also just gaining greater efficiency and leverage in our other cost of revenue areas such as cloud cost and streaming delivery. We think all three are equally important to the story in 2024, and we're looking forward to building on that progress.

Okay. We've got a question now from Rich Greenfield on advertising. With advertising revenues still under 14% of your revenues, I'm surprised to see it's not growing faster than subscription revenue. How do you accelerate advertising growth to reach your goals of it becoming 20% plus of your overall revenues?

Yes, I’d say a couple of things here. First, we're very pleased with how advertising is growing. The market continues to be choppy, but our FX-neutral high-teens growth on the advertising side is really strong relative to the industry overall. We feel good about the advertising growth. That's number one. Number two is, we've obviously seen faster growth on subscribers in general, plus we've had a price increase. So the overall growth on the premium side has been even faster than expected when you factor in both outside subscriber growth and the price increase. Lastly, I would just remind you that the advertising business is impacted more significantly by FX than the premium business. So when you're thinking about reported numbers, that also impacts the progression. However, we feel good about both sides of the business right now. Everything is progressing as planned.

All right. We've got a follow-up from Rich Greenfield on podcasting. How should we think about the revenue opportunity and gross margin impact of shifting from an exclusive podcast like Call Her Daddy or Joe Rogan to nonexclusive?

Yes, Rich. To kind of up level and talk about it generally. When we walked into podcasting, we went in with multiple strategies at once. We did exclusives that you're referencing, but we also did our own and original programming, and we also did licensed nonexclusive deals. At the time, most people thought this was an all-out exclusive effort similar to that of Netflix. We said we would take a more opportunity-driven approach and try many different things. For some shows, exclusive matters; for others, it doesn’t. The general story here is that while exclusivity was initially net positive, it isn’t driving as much opportunity as we see on the ad side. By broadening distribution, we think we can accomplish several goals, including aligning more closely with creators who want to be on multiple platforms and reach a bigger audience. Advertising is in a strong growth position for us, and this new strategy makes us better aligned with both creators and Spotify.

Okay. Our next question comes from Zach Morrissey on Marketplace. Can you provide an update on marketplace and how that performed in 2023? How should we think about momentum into '24?

Yes. Marketplace performed really well in '23. The growth rate and contribution to gross profit grew at rates similar to 2022—really strong growth in '23. To reiterate what Ben said earlier about overall gross margin, marketplace will be a key contributor, alongside the podcasting flip and some other costs of revenue.

Okay. We've got a follow-up from Zach. You saw strong subscriber growth and marketing leverage in 2023. How are you thinking about marketing spend in 2024? Do you see more room for further efficiencies?

Yes. Just a reminder, I talked about this during the Q1 earnings call in 2023, where I was positively surprised by some efficiencies we were seeing alongside healthy top-line growth. That trend has continued for much of 2023. We don't know how far it will go, but I feel good about the efficiencies so far. The concern is that healthy responses intra-quarter may impact the brand long term. We'll always be careful about that. What we’ve been seeing is substantial efficiencies, and I expect more, but we’re still debating how much. Long-term growth is our priority. You'll see us modulate quarter by quarter; some quarters we might spend more, some less. The critical metric for you should be LTV to SAC. We’ve seen it going down in 2022 and '23 with the efficiency in some of our spending. Now we have higher hurdle rates, so we'll be more diligent about these marketing investments. The spending might be more opportunistic quarter by quarter.

Okay. Our next question is going to come from Eric Sheridan on operating priorities. Following your fourth-quarter restructuring, what's your updated view about balancing long-term growth investments, accelerating the pathway to long-term margin targets over the next few years, and optimizing internal efficiency on an annualized basis?

Yes, I’ll start, and then Paul or Ben can chime in. I talked about this in my introductory remarks; it is a new way for us to operate as a company. We are consistently thinking about efficiency top line. We started doing it in early 2023, and we will gradually keep improving. Investors should expect the same much for 2024. We'll continuously look for ways to be more resourceful with our resources. That said, some concern is that this may sacrifice growth. We still care about long-term growth because we believe that will help us solve real and meaningful problems for consumers and creators alike. It’s a balancing act. Rather than focusing solely on growth, we’ll optimize based on various parts of the funnel; sometimes it's top line growth and sometimes it’s bottom line growth. As a general trend, we had healthy top-line growth in 2023, and 2024 is about monetizing more of that growth.

I would just add, thinking about free cash flow and the acceleration of free cash flow and better profitability gives us so much more optionality moving forward. You've seen the inflection in free cash flow, and now we've been profitable on an adjusted basis for two quarters in a row with the forecast for Q1 of next year. This puts the business in a much better place to invest in areas that truly make sense for the long-term.

Okay. Our next question is going to come from Rich Greenfield on audiobooks. What surprises you most about the current state of the audiobook market?

Yes, Rich. I think it's two parts of focus. On our side, the intriguing part is we are able to bring a whole new audience to audiobooks. The biggest surprise has been the type of titles that resonate with consumers. These are not the normal titles that traditionally do well, and it's pleasing to see because that means we're bringing a new audience to audiobooks—a format that's incredibly useful. I’m also happy to see our publishing partners and authors are excited about the innovation and open to new ideas. This is an important industry globally, and it’s encouraging to see a hunger for innovation among our partners. This has been a positive surprise, and we’re seeing impressive value added to our subscriber base from audiobooks.

Okay. Next question is from Benjamin Black on margins. Last quarter, you mentioned 2024 gross margin should exceed those of 2023. Is that still the case? If so, how should we be thinking about the trajectory of gross margins throughout 2024?

Thanks, Benjamin. Building on my earlier commentary, we feel very excited about the potential for 2024 gross margins. I mentioned some of the building blocks ahead of us heading into this year. You should expect us to continue focusing on building sequential growth in gross margin and executing against those building blocks of opportunity.

Okay. Our next question is going to come from Jessica Reif Ehrlich on the music business. Universal Music Group just pulled their music from TikTok. What are the implications for Spotify from a competitive standpoint? How does this impact, if at all, your negotiations with your recorded music partners?

Yes. Obviously, I won't comment on any sort of competitive dynamic. What I can say is we feel really good about our relationship with our music partners. It’s probably the best it’s been in some time. We feel great about the value we’re fostering in the music industry. That's being widely recognized, and I don’t think this has significant implications for our competitive dynamic. We feel good about our partnerships and the opportunities we have to enhance them.

All right. Our next question is from Maria Ripps on audiobooks. Could you talk about what type of engagement you've seen with the free 15 hours of audiobook listening? To what extent do you think the expanded value proposition is driving any of the subscriber momentum? Are you seeing any uplift to audiobook purchases in the relevant markets?

Yes, Maria. As mentioned earlier, the engagement has been strong, and I’ve been positively surprised by the content mix that our consumers are engaging with. It’s a lot of entertainment and culture and many younger and new authors. Our model allows for consumers to take a chance on new books without using credits, which drives engagement. Regarding its impact on our business, it might be too early to say, but generally, we know that more engagement means a better value for our consumers. Audiobooks are expensive to buy, so it’s another reason we're offering great value, which allows us long-term flexibility to reflect that in pricing.

Okay. Next question from Justin Patterson on revenue potential. Investors now have confidence in your operating margin potential, and the redesigned app is resonating with users. Looking ahead, what should give investors confidence in your revenue growth, achieving the 20% targets outlined at your Investor Day?

I’ll start with this one, Ben, then you can chime in. This is very much a continuation of the trend of 2023. We walked into the year thinking we would have healthy top-line growth while focusing on improving our bottom line efficiencies. We exceeded expectations on MAU, which translated into exceeding expectations on the subscriber side. When coupled with price increases, this leads to a healthy dynamic. This top-line growth continued through 2023. I’ve said before that MAU growth ultimately translates to subscriber growth, which then leads to revenue growth and eventually bottom line growth. Given what we achieved in 2023, I feel very good about our ability to have healthy revenue growth in 2024, especially when backed by a more efficient cost structure.

No, I think all that commentary is forward-focused and the perspective going forward is strong. The funnel on the user side and subscriber side looks robust. We’re focused on monetizing through both premium subscriptions and ensuring our ad business grows at a healthy rate.

Okay. Our next question is going to come from Kannan Venkateshwar on product. Given that pricing is a bigger part of the growth algorithm, have you considered models beyond the All-You-Can-Eat framework used today?

In fact, we do have some other pricing mechanics throughout the world. It’s easy to think Spotify is a single proposition globally, but that’s not the case. For instance, we have day passes in certain markets and week passes. We also have physical gift cards that allow people to top up their Spotify listening. We’re adapting our pricing models in favor of consumer preferences. The challenge, however, lies with the policies of platforms like Apple that prevent us from innovating in profitable ways, which limits our functions in iOS ecosystems. We’re looking to do more in other territories, but Apple’s stance poses a significant hurdle.

All right. That's a good segue into Michael Morris's question on the Digital Markets Act. You posted twice about the DMA with the potential positives for your business and also your dissatisfaction with Apple's proposed changes. Do you expect the DMA to be implemented in a way that supports your vision? If so, what do you expect the new functions to be available, and how may they impact the company financially?

Yeah, Michael. The truth is we don’t know yet. We've outlined how we’d comply with the DMA, but this greatly depends on Apple's stance regarding our operations. Apple responded, asserting their position which appears to conflict with our stance while seeming to superficially comply. The good news for investors is that we can continue operations under the old terms, but there is potential future upside. We could benefit from innovations like fan clubs and others that might otherwise cause Spotify to become unprofitable if Apple maintains their current stance.

Okay. Our next question comes from Batya Levi on audiobooks. How should we think about the impact of audiobook consumption cost on margins?

Thanks, Batya. We don't generally break out individual components like that, but while we're investing in audiobooks, we see a nice improvement in gross margin through 2024. We've talked about at the Investor Day where we believe the long-term gross margin of the audiobooks business can reach a favorable position. We're still encouraged about that. Overall, we’re very optimistic about continued gross margin progression throughout 2024.

Okay. We've got another question from Kannan, this time on the music business. Has growth in international markets helped flip any major ones from fixed minimum payouts to variable payouts? Could we see some impact in 2024?

Great question, Kannan. The short answer is yes. It’s been a steady progress in how we grow the user base and monetize in these international markets. There are two engines: driving subscriber growth and building subscription revenues, while also lighting up advertising in these markets, both of which help clear hurdles in fixed minimum payouts. It’s a story of consistent progress.

Okay. We've got another question from Doug Anmuth on podcasting. With most major podcast content renewals resolved, what are your key priorities for the podcast business in 2024?

Yes. It’s more of a continuation of 2023, with the exception of the transition from one structure to another that we completed in 2023. Now it’s back to innovation and growth. I’m excited about the new requests from creators to enhance their content delivery and audience engagement. This has led to growth in features like video podcasting and interactive Q&As. We’re only at the beginning of these changes and plan to increase content and engagement on our platform. Profitability in podcasting has been the focus throughout 2023, and it will continue as we grow the medium, which is significantly larger than perceived.

Okay. We've got a question from Rich Greenfield on user engagement. Daniel, you've talked about user interest in your Hack Day creation day list, which feels like another AIML use case to drive engagement. How is this impacting overall usage and time spent? And by the way, my day list for today is Sad Tailspin Tuesday.

Well, hopefully, nothing we're seeing on this call today gives you any reason to tailspin. But, jokes aside, this is an innovation story for Spotify. Our engineers and scientists are testing cultural aspects to bring personalization to people. People react positively to this and express their identities through music. Searches increased by over 2,000 for 'day list.' It's a feature many are excited about, and it showcases our ability to create content with great engagement, not just in music but also on audiobook and podcasting sides.

Okay. Our next question is from Benjamin Black on efficiency. What are some of the key learnings you've seen with the more streamlined cost structure? Looking ahead, what's your philosophy on headcount growth?

The key takeaways are not unexpected. Initially, everyone worries that cutting certain functionalities would stop everything, but often, we find that most things can function well in their absence, leading to new focus and energy on high-value activities. The notion of being relentlessly resourceful has become critical. This means reallocating existing resources to their most impactful uses, and we have room to improve this. We aren't allergic to headcount growth but will set a higher hurdle rate for new investments. We will be diligent in evaluating past initiatives, deciding where to allocate our resources more effectively moving forward.

All right. We've got time for a few more questions. Our next one is from Steven Cahall on margins. The first quarter is typically the lower margin quarter of the year. Are there any one-time benefits in the strong implied Q1 margin guidance? Can we assume the same seasonality of sequentially improving margins for 2024?

Thanks, Steven. You’re in the right realm of thinking about this. In 2023, we had a lot of focus on growing users and subs while driving monetization. This has shifted our core business, and I think Q1 will reflect that new business model well. This provides a new starting point for margins to grow sequentially moving into 2024, and we look forward to seeing the progress.

Okay. We've got a question from Richard Kramer on execution. What's the message to the organization about new growth initiatives following your recent headcount reduction? How do you mitigate the execution risk in 2024?

Implied in your question is how to both save and grow. In my last response, I emphasized the importance of being relentlessly resourceful. We need to become more efficient by deprioritizing some initiatives while investing in new ones. By constraining resources, we focus on how to execute new growth initiatives effectively. Execution is vital rather than strategy. We're exploring quick ways to prove what's working. The team is energized by these changes and by the positive momentum, which fuels optimism about what's to come. It was hard to do a reduction, but the team is excited about our healthier future.

All right. We’re going to take one last question from Maria on podcasting. Is it reasonable to assume that Spotify is looking to structure most of its podcast deals in a similar fashion to what was reported in the Wall Street Journal regarding Joe Rogan? How is the company thinking about the trade-off between engagement and advertising revenue or profitability by deemphasizing exclusivity?

Yes, Maria, I sort of mentioned these points earlier. We’ve employed multiple strategies in podcasting, not just exclusive deals. Over time, we have determined that while some exclusivity deals were initially successful, they aren’t always aligned with what creators want. Creators want the broadest audience possible. Our new deals make us better aligned with both creators and Spotify; we share the audience growth and revenue growth. This is a different position now as Spotify is one of the top podcast players, thus decreasing the need for exclusives that were important when we were smaller. Our new strategy ensures everyone is better aligned with growth ambitions leading to exciting opportunities ahead.

Great. Thanks, Maria, and thanks, everyone, for your questions. That's going to conclude our question-and-answer session today, and I'd like to turn it back over to Daniel for some closing remarks.

Thanks, Bryan. The long-term opportunity for Spotify is strong—hopefully, you heard that during the call and Q&A. We will continue to innovate to deliver for our listeners, artists, creators, and authors. Make no mistake: we will continue to make bold bets, invest, and seize opportunities when they make sense. But it's clear we will do so with a more disciplined approach. Thanks, everyone, for joining us today.

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.

This concludes Spotify's Fourth Quarter 2023 Earnings Call and Webcast. Thank you for your participation. You may now disconnect.