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. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to Bryan Goldberg, Head of Investor Relations at Spotify. Bryan, you may begin.

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 #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 Investor Relations at [email protected] and we'll add 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, 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 Monthly Active Users (MAU) 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 MAU 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 the basis for expectations for every subsequent year. 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 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 our execution throughout the year, getting us to an even better place than we've ever been. The third issue relates 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 back to what we were doing before; we still anticipate improving profitability over the course of this year and into the next. New funds are being directed toward acquiring and reactivating high-value users to 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. So how do we expect this to impact our business in the coming months? 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 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 adept at pivoting our attention when it makes sense. When I say pivot, I mean making adjustments that will get us to an even better outcome. Because of our ability to do this, I have no doubt that we can recapture top-of-the-funnel growth over time as it becomes more of a focus area for the team. Before I turn it over to Ben for more detail into the numbers, I also want to mention our new CFO, Christian Luiga. I've worked with Christian directly, and I can tell you first-hand that he's a terrific leader who excels at 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 all getting to know him when he joins 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.

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. 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 financials. 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 a 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 currency basis to EUR3.6 billion, representing a 100-basis-point improvement relative to Q4. Notably, our recent price increases and 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's 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. Gross margin came in at a Q1 record of 27.6%, surpassing guidance by 121 basis points and resulting in our first-ever EUR1 billion gross profit quarter. As you're well aware, many components can move our gross margin, and Q1's performance was primarily driven by content cost favorability among other smaller movements. Operating income of EUR168 million also set a new record, aided by gross profit strength and lower operating expenses. Operating income was impacted by EUR82 million in social charge accruals, which were EUR74 million 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, as they are outside of our control. Finally, free cash flow was a positive EUR207 million in the quarter. Performance here reflected the expected reversal of some of the timing benefits we saw in Q4. 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 EUR3.8 billion in total revenue. We also anticipate a gross margin of 28.1% and an operating income of EUR250 million. Regarding our user growth outlook, as Daniel mentioned, we've made some adjustments to further optimize our marketing activity and expect improving MAU net add 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, like Q3 of last year, we are incorporating some modest levels of churn into our Q2 outlook. 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 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 Bryan for Q&A.

All right, thanks, Ben. And again, if you've got any questions, please go to slido.com #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 extra cost did audiobooks add?

I'll start and maybe Ben you can add to the answer. To uplevel the answer a little bit and talk about gross margin in general. This was a real outperformance on many levels, and there were many things that contributed to that. Marketplace did really well in the quarter, and it continues to have a great position on all of our Marketplace products growing nicely. I feel really good about Marketplace, and that was a big contributor. Additionally, on the gross margin side, we saw lower non-music costs. Some of that was aided both by our audiobook side and also on the podcasting side. Last year, if you recall, that was a bit of a drag on our gross margin, and this year we expect profitability for the podcast segments, which is adding to that. Additionally, we saw lower streaming delivery costs, and overall costs have improved due to our resourcefulness and that culture. So I believe it is really a new Spotify, where we are being relentlessly resourceful in all our costs and driving improvement in efficiency on all our different drivers that are adding up to this gross margin number.

I think you covered it well, Daniel. I would just add that the resourcefulness you highlight spans a diversified set of levers that are all contributing to this narrative. So, it's really firing across many cylinders for our business.

Our second question is also going to come from Agnieszka on royalties. For the bundled music and audiobook plans, are royalty payments for each category based on a fixed allocation of relative value of music versus audiobook plans, or is it based on the actual share of consumption? That is, would increased audiobook consumption reduce music royalty?

Thanks, I'll take this one. This is a great question. We won't be able to get into specifics here, but I think you are touching upon a very important point that I'll try to elevate. It's a fairly complex machine across our content types, and we have a concept that I'll refer to as shifting profit pools. Across our content types, we have all types of cost models. We've got variable ones, which could be anything from revenue shares, per user models, and per hour models. We also have fixed cost models. It's a complex system, and bundling things together allows us to tap into a strength of ours, which means leaning into this complexity across profit pools and managing it efficiently as we look to meet and serve customers where we see it. So, I think it's as simple as that.

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 EUR2 billion in free cash flow in 2025. Given this, how will you and incoming CFO Christian Luiga look to re-evaluate your capital allocation policy?

I appreciate the question, Justin, and it's certainly a new type of problem for Spotify to be dealing with. I think it's a little too early to draw any sort of real decisions yet on our side. Obviously, Christian hasn't started yet, but this will be on his table to look at and to work with myself and the Board around what we do. I want to note to investors, though, that we do have the upcoming convertible, which is certainly one use of capital we could utilize in the future. We have many tools at our disposal, so we look forward to discussing those as the year progresses.

All right, and a follow-up question from 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?

You're exactly right, Justin. We are focused on shipping more products and better products for consumers. 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. The more value we create, the more ability we will have to capture some of that value through price increases. I've mentioned this concept before, but we're really focused as a company on this value to price ratio. 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.

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 $10.99 while the audiobooks 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?

I'll start here and maybe Ben can add. Rich, I think my last answer kind of captures this. What we're focused on at Spotify is really, we're trying to improve as much value as we can. Over the last two years, we have added a tremendous amount of value. We've added more and more podcasts than ever before—millions of podcasts on the service. We've added a library of over 100 million music tracks. We've added audiobooks in many markets, and more than 25% of our base are now using that. In the first 14 days of new users using audiobooks, we see over 2.5 hours of incremental usage on the audiobook side. So we're seeing some great results. We've added video on both the music side and the podcasting side. We're adding a tremendous amount of value over the course of the last two years and more product features like AI DJ and playlists. We're focused on capturing some of the value we've been adding over the past two years by increasing the price. We feel really good about our healthy guidance on subscriber numbers too, because we think consumers appreciate what they're seeing from Spotify. They love the offering and feel that the value they are receiving is very fair.

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? Does organizational change reflect increased discipline and higher lifetime value to customer acquisition cost thresholds? Where is that ratio versus historical levels?

Absolutely. I'll take that, and I'll start with it. Maybe Daniel, you can add your thoughts. It's important to first start my answer here with just a bit of context. We started honing in on marketing efficiency as we entered 2023. More than a year ago, 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, including product changes and innovations. We also had a strong end-year effort with activities such as Wrapped and campaigns around the holidays. All these things contributed to the observed variability in Q1. That being said, we've had great learnings and insights from this performance, notably as we've talked about—thinking about our marketing spend and how we calibrate that. You are right to point out that we are focused on a high lifetime value-to-customer acquisition cost threshold. We also want to ensure we're capturing all the opportunities under the investment curve in different markets. Striking that balance is important.

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?

This is very early days. For those who 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 a massive potential opportunity for Spotify, but it's too early to gauge the results of the specific test we have. Many things with Spotify are often driven by consumers or creators tapping into a need. A long while ago, we added the ability to have certain podcasts behind a paywall, and we observed that some of these podcasts were offering courses, enabling users to consume and unlock them via Spotify, which is a great use case. The issue, however, is that this has not resulted in an ideal user experience for consumers. So, users are creatively utilizing our system to do more things. Similarly, on education, we've started observing how people are using Spotify for educational purposes. We’re working on creating a more compelling experience in education, adding more tools that allow educators to engage not just through audio but also video. Long-term, if you look ahead, education is a significant opportunity. Consumers increasingly relate to individuals rather than faceless brands, a trend we are very excited about.

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 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 audiobooks or other premium features?

I'll start and maybe Ben can add. We don't pre-announce anything we're doing on specific price increases. However, as I mentioned, the general approach is really about value to price ratio. We're continuously assessing the value we’re adding, how consumers in those markets are responding, and what is the fair price to maintain a good value to price ratio. We're doing this in multiple ways. One is adding value to the base tier, and another way is to enhance choice for consumers. Over the years, we have added more ways for consumers to choose different plans on Spotify. This is now about offering as much flexibility as possible for consumers to select plans that they feel provide the best value for them.

Okay, the next question will be from Benjamin Black on 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?

Thanks, Ben. 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 and the sequential momentum we have. So consider this a real trend and not just a function of one-offs. As I stated in my prepared remarks, we have numerous moving parts, as is the case every quarter. There are many factors driving the upside, including non-music, music, and marketplace. We also had movements in other costs of revenue such as continued favorability with cloud costs, as Daniel mentioned. So various factors contribute to this positive trend, and we see momentum in these same areas persisting into Q2.

Okay, and we've got another question from 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's changed a lot since then. Were the changes 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?

One of the things we talked about at Spotify is that change is the only constant. The fact that we're changing should not come as a surprise to you as investors, as that’s a core principle we maintain internally. You can see that in my opening remarks too where I mentioned how we pivot our focus internally. To set context on the 2022 Investor Day, it wasn’t as much a backward look, but a forward one. We tried to outline our plans moving forward. The Spotify machine illustrates that we are not merely a one-trick pony anymore, but multiple verticals working together to provide a consistent positive user experience. This creates multiple entry points for engagement, driving more interactions with the product. Specifically regarding resourcefulness, I agree we have made a pivot more significant than initially planned, but we did indicate that 2022 was an investment year and that we would return to focus on a different approach. I would say it remains an 80%-20% story: 80% of our goals remain constant, and 20% could reflect added upside due to improved company resourcefulness. I've been pleasantly surprised by the resilience and resourcefulness shown by the teams concerning costs and delivery.

Okay, we've got a question from Rich Greenfield on TikTok. With the US Government set to ban TikTok barring court intervention, how are you thinking about the opening that could create in music discovery and short-form content tied to music?

I'm not going to comment on other companies and their strategies related to regulatory proceedings. What I will say is that we are focused on enhancing discovery and adding as many options as possible to improve the discovery of music on Spotify. You saw us in the quarter add music videos. You're going to see music clips come into play more prominently, and you can already see more videos appearing on the music side where artists engage with fans, similar to how Reels functioned a few years ago. The competition has helped elevate user experiences across the board, and we aim to leverage those trends in our own product improvements. Short-form music content is a big focus of ours, and you're going to see more video incorporated into the product in 2024, as well as additional AI integrations in music. Additionally, expect to see a more diverse global music ecosystem than ever before.

All right, we've got a follow-up from Rich Greenfield on top-line growth. Daniel, in the short video you created on the quarter, you seemed pleased with your 20% revenue growth rate. Premium has been the key driver aided by price increases. How should we think about advertising growth moving forward? Can it contribute to your overall growth rate and grow 20% plus?

You're right that our premium product was the primary driver for the quarter, and we felt very positive about that. Ben may want to add to this, but we saw solid performance regarding advertising as well. However, it’s a bit early to predict how the macro environment will impact advertising growth, but I remain cautiously optimistic about our growth potential. Keep in mind, even if advertising becomes a stronger component of our revenue, it's still a relatively smaller portion of the mix. Enrollment numbers in subscription are a major factor in achieving our 20% revenue growth target. Did I miss anything, Ben?

I would add that in the most recent quarter, advertising was just shy of the 20% growth mark. We are closing the gap between the growth rates of both segments. In the near term, we continue to see robust growth in supply and monetizable impressions. We are focusing on optimizing all channels to meet the growing demand as advertising budgets gradually unlock each quarter.

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 on the financial model?

Generally speaking, just to set expectations, we're always working with our partners across various content mixes and major labels. Our focus is on operational improvement, enabling flexibility in collaboration. A great example is the introduction of music videos, which are now in 11 or 12 markets globally. This highlights our partnership with record labels and artists. From a financial impact perspective, the more we can enhance engagement, the more value we create, and the greater our ability to capture this value through price increases or increased advertising inventory, benefitting not just Spotify but the entire creative community.

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?

I spoke about this earlier, but a significant part of this next phase for Spotify is providing more flexibility for consumers. We have shifted from a single plan of $9.99 to improving family plans, adding Duo, and introducing various pricing options such as day rates and weekly rates in certain markets. You will see more tier options that allow consumers to choose the plan that offers the greatest value based on their use of Spotify. Concerning our content partners, I won't get into specifics, but it's important to acknowledge the natural tension between suppliers and distributors. There is always tension around payments. However, I’d like to emphasize that Spotify in 2023 had record payouts to the creative community, with global publishing revenue hitting a record for 2023, and even more expected in 2024. I feel positive about our relationships with partners and delivering value—publishers and songwriters are seeing better outcomes than they did during the CD era.

Okay, our next question is going to come from Jessica Reif Ehrlich on advertising. This past quarter, the Trade Desk called audio advertising a key area of growth for their business. Programmatic advertising is currently a small part of your business. Can you provide insight into the growth opportunity in programmatic advertising and ads in general?

Thanks, Jessica. It's a great question. We believe, as you framed, that programmatic is an emerging and important part of the mix, and we are optimistic about this channel long term. It presents an opportunity for small to large enterprise clients across the board. As Daniel mentioned in a previous answer, advertising remains a smaller portion of our overall revenue, and as you pointed out, programmatic falls within that smaller segment. Currently, we continue to concentrate on optimizing across all formats and delivery channels to capitalize on this opportunity effectively. In terms of the near-term outlook, we remain optimistic about the prospects as advertiser budgets are gradually unlocking each quarter, and we have positive macro trends heading into the summer and second half of the year with global events like the Euros and Olympics.

Great. We actually have time for one more question, and that's going to be a follow-up from Jessica Reif Ehrlich on Christian Luiga. 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?

I've seen Christian first-hand for quite some time. A fun anecdote: Christian was part of the team at TeliaSonera that made the Spotify investment in 2015. He’s familiar with the company and myself and Martin Lorentzon, one of Spotify's co-founders. Following his progress at TeliaSonera and then Saab has been enjoyable, and he's maintained a consistent, impressive track record in improving the bottom line while also focusing on driving a better business on the top line. This made him the right fit for us. His top priorities upon starting will be to drive further improvements in resourcefulness—a key mantra for us. We believe there are still many opportunities to enhance our efficiency. Moreover, capital allocation will be a priority, which I’m sure we will discuss as the year progresses. We're excited about his addition to the team, and I look forward to everyone meeting him.

All right, 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.

Thanks, Bryan. We've talked about 2024 being the year of monetization, and I believe we're genuinely delivering on that ambition. With our focus shifted towards strong revenue growth and margin expansion, we see a clear opportunity to grow the top of our funnel as well. I feel positive about the changes we're implementing and remain very confident in our ability to fulfill the ambitious plans we've outlined. Thank you, everyone, for joining us, and I look forward to speaking with you next quarter.

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.