Good day, and welcome to Spotify's Second Quarter 2025 Earnings Call and Webcast. 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 Second Quarter 2025 Earnings Conference Call. Joining us today will be Daniel Ek, our CEO; Alex Norstrom, our Co-President and Chief Business Officer; Gustav Soderstrom, our Co-President and Chief Product and Technology Officer; and Christian Luiga, our CFO. We'll start with opening comments from the team. And afterwards, we'll be happy to answer your questions. Questions can be submitted by going to slido.com, and using the code #SpotifyEarningsQ225. 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 the call over to Daniel.

All right. Hey, everyone, and welcome to our Q2 earnings call. Overall, it was a solid quarter, especially when you look at our strong user growth across both subscribers and MAU. In fact, looking at the first half of 2025, subscriber net additions grew more than 30% versus the first half of '24. This quarter also marked a huge milestone for us as we hit over 100 million subscribers in Europe, our largest region, and it was our second highest Q2 for MAU net additions. User engagement also continues to strengthen. And this clearly demonstrates that the enhancements we made to both expand our content and improve our product are having the intended impact on our business. People come to Spotify and they stay on Spotify. And by constantly evolving, we create more and more value for the almost 700 million people using our platform. And this value not only benefits users, but it's attracting more people to streaming. And as a result, it also boosted the industries of music, podcasts and audiobooks. However, as I look at our progress, the one area that hasn't yet met expectations is our Ads business. We've simply been moving too slowly and it's taken longer than expected to see the improvements we initiated to take hold. It's really an execution challenge, not a problem with the strategy. And while I'm happy with where we are today, I remain confident in the ambitions we laid out for this business, and we're working quickly to ensure we're on the right path. And we are seeing some promising signs in our Programmatic business, which I think will set us up nicely for '26. Alex and Christian will share more details on that shortly. As you also look at the underlying fundamentals of the business, this year is largely playing out as we expected. But in the spirit of transparency, you'll see a few places in our Q3 forecast where we are probably a little bit lighter than you may have anticipated. So let me talk about that. First, big picture. The business is solid and our model holds up and I feel really good about where we stand and how consumers view Spotify. We still expect 2025 to be a standout year for Spotify. And this quarter brings us one step closer to that goal of 1 billion subscribers. And looking ahead, we'll keep pushing boundaries through innovation, bringing even more value to users and creators. This, of course, expands the overall Spotify network as we build a larger, more vibrant platform that will benefit everyone where fans gain access to more of what they love and creators will have a global audience to reach. But let me also take a step back to remind you how we run Spotify. Our approach has always been and will continue to be focused on creating lifetime value rather than optimizing for quarter-to-quarter performance. Lifetime value is such a powerful metric because it inherently captures the balance and trade-offs between chasing short-term opportunities and driving long-term strategic initiatives. It acknowledges that not every decision will yield immediate returns and that our progress is not always linear. Many of the initiatives driving today's strong user and subscriber growth were started several quarters or sometimes even years ago. The exact timing of when these efforts flow into tangible results can vary, sometimes that's within our control and sometimes not. But the most important takeaway for you all is that we don't make decisions to achieve specific short-term quarterly outcomes. But zooming out, we are very well positioned, and I feel very good about our business. And with that, I'll hand it over to Alex.

Thank you, Daniel. So I want to cover a couple of things. As you heard, we are super excited about the user and subscriber growth we saw this quarter. First, let me just set the stage on our subscriber growth story. Over 3% of the world's population subscribes to Spotify. That's pretty astounding, but also really encouraging when you think about how far we can still grow from here. It's not implausible to imagine us reaching 10% or even 15% of the world's population. It's also awesome to see that we continue to uncover new subscriber growth opportunities even in our developed and mature markets. It's just great to see the business performing, striking the right balance with our marketing mix as well. We also see this in our conversion rate from free to paid users, which is healthy and just continues to tick up nicely. Secondly, I want to expand on Daniel's comments on our Ads business. Bottom line, we see a ton of potential in this business, and I believe in the strategy, but we are recalibrating because we have to move faster to accelerate its contribution to our financials. I spent a lot of time over the last couple of months meeting with brand partners, and there's a lot of excitement about working with Spotify, especially with the automated ads and all of the new tools that we've recently introduced. We have an enviable brand and a highly engaged loyal user base that advertisers want to tap into. In fact, we've grown monthly active advertisers by more than 40% year-over-year. We will continue to build on this growth in the second half of '25, which will be focused on driving improvements in our execution. With the heavy lifting in our ad tech largely complete, we're now focused on driving adoption, launching even more new tools for advertisers and improving the performance of all of our inventory in order to fully monetize our new biddable channels. We are creating a stronger, more sustainable Ads business by accelerating our automation efforts and enhancing our world-class brand operations. Now I'll pass it to Gustav to share some insights around some of the ways that we're increasing the value for users and creators. Gustav?

Thanks, Alex. So our overall user growth story is really a testament to our teams who have been really hard at work to deliver the best possible experience to users, artists, creators and authors. We're solving for real problems that they face while also driving meaningful impact to our business. And there's no question that this multi-format strategy is working. The data clearly shows that the more content formats that we deliver for our users, the more engaged they become. This is especially true with the super users who are not only spending more time but also more days on Spotify. Looking at our core business of music, excluding China and Russia, 45% of people who pay for music streaming services subscribe to Spotify according to media research. That percentage has been steadily growing over the years. Now, as you know, in 2024, we went all in on video, and there are now more than 430,000 video podcasts on Spotify. Video continues to outperform with consumption trending higher and higher, growing 20 times faster than audio-only consumption since 2024. Over 350 million users have streamed the video podcasts on our platform, and that's a 65% increase year-over-year. Now, as we look to understand impact, obviously, user engagement is a critical metric for us. As we rebuild our stack for the generative AI age and bring personalization to a whole new level, we're seeing it improve significantly. For example, listeners have been telling us just how much they love Spotify's DJ, and user engagement with DJ has nearly doubled over the last year. Spotify Premium users wanted more than just a one-way channel with the DJ. They wanted a dialogue. So we delivered that. Now, in more than 60 markets, DJ takes music requests, serving up suggestions using AI and also insights from our global editorial experts. So now you can ask the DJ questions that require Spotify to understand the wider world, like, for example, play me that song where Bruce Springsteen invites up that fan on stage in the music video. DJ will understand that you are requesting 'Dancing in the Dark.' We also clearly see that the more people interact with DJ, the better and longer their sessions get. This has resulted in a nearly 45% increase in DJ streams globally, driving tens of millions of interactions to date. We also continued to expand our popular AI playlist to premium listeners, bringing it to over 40 new markets, and millions of users have responded by creating playlists with this tool. Previously, when we constructed algorithmic playlists for our users, we were confined to guessing the tracks that the user would want based only on their past listening. So signals like plays, saves, and skips. Now, with generative AI, the user can finally tell us in plain English what they actually want, what's on their mind, and even what they're doing right now. These are often things that would have been impossible for us to understand from listening data. So imagine, for example, trying to guess, make me a playlist with songs to pump you up on earnings day in late July when your family is on summer holiday without you, just by looking at my listening history. It's pretty hard. Now this is a big deal because we can now use these data sets to iteratively improve these products continuously after launch in a virtuous loop, something called preference optimization without any additional product or feature development needed. We've already done our first round of optimization on AI playlist, and we saw clear jumps in performance, such as people listening longer to the resulting playlists or saving them more often and so forth. Because of the experience we deliver and the combined strength of our subscription and free tiers, it's no surprise that according to Luminate, 65% of global audio music streams happen on Spotify now. Now let me turn it over to Christian to walk you through the numbers.

Thank you, Gustav, and thanks, everyone, for joining us today. Let me cover first the quarter 2 results, and then I'll come back with a bit of perspective on our outlook. So first, starting quarter 2, MAU grew by 18 million to 696 million in total, exceeding our guidance by 7 million. We added 8 million net subscribers, finishing at 276 million, up 12% year-on-year and 3 million ahead of our guidance. Total revenue was EUR 4.2 billion and grew 15% year-on-year on a constant currency basis. Currency movements during the quarter impacted reported revenue by EUR 104 million relative to our guidance. Our premium revenue rose 16% year-on-year on a constant currency basis, driven by subscriber growth and ARPU gains associated with price increases. Our advertising business delivered currency-neutral growth of 5% year-on-year. Our automated sales channels were the largest contributor to overall advertising growth. If we exclude the near-term impacts from the strategic initiatives like the optimization of our licensed podcast and the rollout of the Spotify Partner program, we had low double-digit constant currency advertising growth. As Daniel and Alex mentioned, we believe there is an opportunity to grow our advertising business more quickly, and 2025 is very much a transition year onto a new tech stack. Moving to profitability, gross margin came in at 31.5%, in line with guidance and expanding roughly 230 basis points year-on-year as we strategically invest to accelerate our long-term growth ambitions. Our margin expansion was driven by premium revenue growth outpacing music and audiobook costs, partially offset by the Spotify partner program cost. Additionally, our ad-supported margin expanded due to podcast and music gains. Our operating income of EUR 406 million was EUR 133 million below guidance, primarily due to social charges in the quarter, which were EUR 98 million above forecast due to share price appreciation. As a reminder, we don't forecast share price movements in our outlook for the business since they are outside our control. The remaining variance to guidance was largely driven by a lighter ad sales contribution and a tax-related charge. Finally, free cash flow was EUR 700 million in the quarter. Year-on-year performance here was driven by our growth in operating income as well as our improving net working capital. We ended the quarter with EUR 8.4 billion in cash and short-term investments. Looking ahead at our guidance in quarter 3, we are forecasting 710 million MAU, an increase of 14 million from quarter 2; and 281 million subscribers, an increase of 5 million over quarter 2. We're also forecasting EUR 4.2 billion in total revenue. Our revenue outlook incorporates a sizable headwind of approximately EUR 200 million due to unfavorable currency movements over the last quarter. We're also forecasting ARPU to be flat year-on-year on a constant currency basis. Moving down the P&L, we expect quarter 3 gross margin of 31.1% and an operating income of EUR 485 million. Consistent with our previously stated expectations, our gross margin guidance reflects a more variable rate of sequential gross margin progression over the course of this year as we undertake strategic investments to support long-term growth. Quarter 3 gross margin guidance also reflects a regulatory charge of 40 basis points, consistent with the prior year period. Excluding the regulatory charge, our expected quarter 3 gross margin is in line with quarter 1 and quarter 2 levels. We remain confident in our business and while we're investing in future growth, we will deliver a full year margin expansion in 2025. Our operating income guidance reflects temporarily elevated growth in operating expenses in quarter 3 due to timing factors, and we remain well positioned to deliver year-on-year expansion in operating margin for the full year of 2025. With respect to capital allocation, our liquidity remains strong, and we expect 2025 to see healthy year-on-year growth in free cash flow. We continue to focus on prioritizing growth opportunities while managing our balance sheet to support our long-term strategy. We are also planning for the upcoming maturity of our exchangeable notes in March of 2026. To the extent excess capacity arises above these needs, we will take our shareholders into consideration. In support of this and as an initial step, the Board has approved an upsizing of our share repurchase authorization to a total of $2 billion, of which about $100 million have been utilized prior to quarter 2. The mandate gives us enhanced flexibility to be opportunistic in this regard. In conclusion, quarter 3 will be more reflective of our near-term investments, and we anticipate that they will bring healthy returns over the medium and long term. Our top-of-funnel and subscriber performance are strong, and we remain confident in our ability to drive healthy growth. With that, I'll hand it back to you, Bryan.

And today's first question is from Jessica Reif Ehrlich regarding product tiers. Can you share your thoughts on introducing tiers, like a superfan tier or another option, across your platform globally? How many tiers can be established without making the user experience more complicated?

Jessica, Alex here. Thanks for the question. We're really excited about engaging super fans, as you know, and we're building something great for them. But what investors really need to understand is how we are building out our products at Spotify. Now, as long as I've been here, which is now, I think, close to 15 years, we've had very high value standards around what and when to release product. Now we're working towards these very high-value standards, and we're making progress for sure, but it's taking time. And in music, of course, we're reliant on our partners to a certain degree. But you have to know that super fans are everywhere and not just in music. For instance, right now, we are in market with an audiobook add-on subscription, which is about getting more hours for the ones that run into the gate that we have in the premium allocation. We have this audiobook add-on subscription rolled out in 13 markets, and we're just excited to roll it out to more markets as we go. Now this add-on really does two things. It better takes care of the demand from our super fans on books and it's enabling access to audiobooks for our family plan sub accounts as well, which we haven't had prior to this. Now the key thing to remember is that we remain very enthusiastic about building out these propositions across music, podcasts and video, and we continue to just see great demand from our different superfan segments.

All right. Our next question is going to come from Benjamin Black on gross margin. This quarter, your gross margins didn't beat your guidance for the first time in a while. Has there been a change in your guidance philosophy? And how should we be thinking about the trajectory of gross margins for the balance of the year and into 2026?

Thank you, Benjamin. I will begin by addressing the latter part of your question and then return to the initial one. As mentioned by Daniel, Gustav, and Alex, we are very confident in how we are managing the business and the investments we're making for future growth and profitability. Over time, we aim to increase our gross margin through various components. In music, this will involve marketplace and ad monetization. For podcasts, we will focus on scaling ad monetization and SVP monetization. In the audiobooks segment, we will continue to monetize the experiences we provide. While we have observed small increases in this quarter, we are also slightly scaling other revenue costs, such as customer service and payment services. This reflects our current view. We do not specifically guide for quarter four or 2026, but we do typically experience a seasonally stronger quarter four. One thing to note is that ad-supported gross margin usually peaks in quarter four. Additionally, we experienced a 40 basis points impact in quarter three that will not be repeated in quarter four. Regarding your initial question about changing our philosophy, we have not changed it at all. Our approach to guidance remains focused on the level of certainty we have regarding our licensing deals and market conditions, which impact margins. We do not provide gross margin guidance when we feel uncertain. Instead, we aim to offer guidance based on a more reliable level of certainty. By doing so, we generally meet or exceed our targets. Currently, we are on target, indicating minimal issues with uncertainty this quarter.

All right. Our next question is going to come from Justin Patterson on AI and for Gustav. Gustav, we enjoyed listening to your appearance on the Invest Like the Best podcast. Could you expand on how generative AI is influencing productivity and product development and how you think the consumer experience might change over time?

I would be happy to, Justin. Thank you. So if we take them in order, productivity, then product delivery and consumer experience. First on productivity, like most other companies, at least the companies who are adopting this technology, we are seeing significant speed ups, specifically right now in prototyping. This is true for many other companies, as well. So that early stage where you used to talk about a product, now you can much faster prototype it and see if it works. We're seeing faster prototyping. We had a hack week this spring that we spent entirely on upskilling the entire workforce. What was interesting there was that it was not only engineers, product people and designers that adopted this, but also non-R&D functions. We saw a lot of adoption from finance and other departments. So that's on productivity; we're seeing the sort of same sort of gains that most others are seeing, and we're excited about them. On product delivery, this is a good observation. It is a very big change to how you build products. For those who are interested, I think to summarize it in one sentence, the biggest change for a product person is that what is called the Eval, the evaluation set is now the PRD, which is the product requirements document. So google Eval is the New PRD, and you'll understand what the big change is. In terms of consumer experience, I think to summarize it, I touched on this in my opening remarks. There is a fundamental difference that happened with generative AI versus the previous AI. We were confined to user signals such as skips, plays, and saves. Those are pretty blunt signals. A skip could be a song that you love, but you're really tired of it; it could be a song that you love, you're not tired of it, but it's the wrong situation; it could be a song that you really don't like. All of those just result in a skip. So these are blunt signals. What's happening with generative AI is the user can finally speak to Spotify in plain English or any language for that matter. You can think of it as us getting a new data set. Spotify got this unique data set from all of its playlists, which was really song to song, like which song goes well with another song, kind of the Amazon people who bought this also bought that. We have the biggest of such data sets in the world, and we're very happy with it, but we're getting a new data set now, which is what English sentence goes with this song. That's completely new to us, and it's a very valuable data set that we are collecting very quickly. This is the big change for us. I would also say that this technology allows you to go from what is today largely predicted user experiences. We predict which songs, playlists, podcasts, or books you might want to listen to, to what is now called reason user experiences, where you actually reason over the user's listening history and what they said in the case of DJ. User experiences will change quite a lot in the coming years. I'm not going to tell you how. I don't think that would be in the interest of shareholders for me to reveal that right now.

All right. Our next question comes from Jessica Reif Ehrlich on capital allocation. You just doubled your share buyback authorization to $2 billion with $1.9 billion now remaining. Do you expect to execute this by the expiration of April 2026? Even if you do, you still have a significant amount of financial flexibility. How are you thinking about uses of capital over the next 3 to 5 years?

Thank you, Jessica. Just I think it's good to start with a long-term view on this and a short-term view. Our first priority is growth opportunities that can drive attractive returns. We want to invest in growth in this company foremost. To do that, we seek to have a balance sheet that supports our long-term strategy. I think that's really important to understand in everything we do. On the other hand, now what we have declared is that we believe the buyback is a good tool to use opportunistically, giving us additional flexibility. We're not going to talk about how much and when that will be utilized, but we believe this is a good tool for us in addition to what we have declared before, and it was important for us to make that statement to you in the market.

All right. Our next question comes from Benjamin Black on ARPU. Could you help us understand the implied FX-neutral ARPU trends for the third quarter? What are the puts and takes, and how should ARPU evolve for the fourth quarter?

In my statement before, I talked about that we would have neutral currency from a currency point of view, also a neutral ARPU in quarter 3. There are some puts and takes on that, of course. The ARPU is driven by all our markets around the world. In the developed markets, we see uplifts in ARPU. Meanwhile, in emerging markets with a strong intake, that will, of course, have more dilution to the ARPU in the short term. Over the long term, it creates a lot of value for Spotify. When it comes to quarter 4 specifically, I will not comment on nor give any guidance until we get to the fall.

Christian, let me just jump in there and add to that a little bit. I want to remind everyone that we operate Spotify to optimize for the long term and not quarterly gains, so to speak. There are short-term fluctuations because of timing issues, but we've always put subscribers on a pedestal, and that's really worked out for us so far. As far as pricing goes, we will raise prices when it's appropriate for the business. I also want to remind you that we take a portfolio approach. In the last quarter, we raised prices in France, Belgium, the Netherlands, and Luxembourg. I can report that on churn, we didn't see anything out of the ordinary for Spotify.

All right. Next question from Justin Patterson on investments in the business. You've spoken about Spotify being the R&D engine of the music industry and that pricing actions reflect that value. As you expand into audiobooks, video podcasts, and education, how are you thinking about the size of investment and degree of engagement to support future pricing?

I'll take this one, Bryan. I'm absolutely psyched about where we are with our verticals across music, video, and books. The important thing for everyone to understand is how we think about the outcome. The outcome can be set with the following backdrop. Everyone on the planet has a relationship with music, possibly even before having a good language. I think we have enormous runway still. With video and books added on top, it just expands the opportunity even further. We've seen that the multi-format works on our platform, like Gustav mentioned in his remarks at the beginning. We now have 3% of the world's population subscribing to Spotify, paying Spotify recurrently every month. Do we get to 90%? Unsure, but it's not implausible to think we can get to 10% or 15%. This is why we've set our new BHAG at 1 billion subs, as Daniel has mentioned previously. I can share some statistics to illustrate this confidence: we have 45% subscriber market share where we operate today, and 65% of all music streams are on Spotify. This backdrop and ambition is what we invest against. We don't comment specifically on the size of these investments, but clearly, our proposition across the three verticals is working out.

Okay. Our next question is going to come from Rich Greenfield on music growth opportunities. Spotify has done a great job taking share from its less innovative industry peers, but overall music industry subscriber growth in developed markets is now relatively nascent. Are there new product packaging that you believe can reaccelerate the industry? Or is it now more about pricing power?

Rich, Alex here again. I'll jump in on this. I think you heard my response in the previous question. We are seeing amazing engagement growth in the last four, even five years across these three formats that we have on the platform today. It is this engagement that we value above everything else. Whether we package in one way or another, it's basically to help users get access to our proposition.

Okay. Our next question is going to come from Doug Anmuth on Apple. You stated in the May Amicus brief related to the Apple court case that U.S. paid sub conversions were improving. How does alternative payment expand the subscriber funnel? And what other opportunities does it open up across purchase flow, communication, marketing, and potential new business lines?

Yes, Doug. As we mentioned in the Amicus brief, it did impact positively our conversions, and you can see some of that in the quarter. Most of the growth was broad-based, and not just in North America, but also in developing markets. It was a great quarter from a growth perspective, both on the subscription side and the user side, but we certainly saw the positive effect of the Apple case in the U.S. Now how does that impact us? The simplest term would be, if you think about the consumer experience pre-Apple case: if you failed a payment as a subscriber, we could notify you that your subscription had expired, but we couldn't tell you anything else. We had to rely on alternative means for reaching the consumer, including emails and perhaps if we were lucky, some other retargeting through advertising to get the customer to redo it. But there was no way for us to directly communicate with the customer. Now in today's environment, we can directly communicate and we can add a call to action in the app. It's not full on payments, but it's still a way to directly notify the consumer. We can also imagine a la carte transactions being a very big potential driver for future revenue growth. This is an important part of our strategy.

Okay. Our next question is going to come from Rich Greenfield on the Advertising business. How much of the changes that you've made to your podcasting business model negatively impacted your advertising growth in the second quarter? What is the organic growth underlying the 5% constant currency growth if we adjust for the podcasts that are no longer exclusive?

Let me start, Christian. Funny, you should ask, Rich, because I was just trying to figure out if there was a way for me to talk about this. Certainly, when you remove inventory from the parts of our premium landscape around the world that has a lot of revenue against the inventory, it's going to have an impact. I'm sure Christian will tell you the actual impact, but I want to mention that we're really encouraged by what we are seeing in podcast and video on Spotify. Some reasons for why we made this change is that video consumption is growing 20 times faster than audio consumption, and 350 million users have now watched video on Spotify. Users who watch a podcast consume 1.5 times more than users who just listen. These are generally good outcomes from our investments into changing the portfolio.

Yes, and just specifically, as I mentioned in my remarks, we have a low double-digit growth if you exclude these more strategic short-term impacts from the inventory that we've taken away and the change in the SPP program.

Okay. Our next question comes from Jason Bazinet on gross margin. Can you please discuss the key drivers of gross margin expansion after 2025?

Yes, thank you, Jason. A little bit I alluded to this before, and I just want to add something as well. Long-term, of course, we do believe there's going to be gross margin expansion, and we will continue that. It comes from the advertising business, as we talked about, that is both in the music side and the podcast side, but also how we monetize the marketplace in music and the SVP in the podcast side. And then we have audiobooks monetization that we continue to do. Daniel just mentioned also the third leg in this, the a la carte that we could potentially introduce, which will also be an expansion driver for the future.

All right. We've got a follow-up question from Rich Greenfield on the Advertising business. Your Global Head of Sales, Lee Brown left yesterday for DoorDash. Were you unhappy with the progress in advertising and made a change? Or was the departure unexpected?

Yes. The main point to emphasize here is that in '25, we've been recalibrating the Spotify Ads business, and we know we need to move faster, as we've mentioned several times before now. That's a diagnosis. We believe in our strategy to build to welcome all the programmatic demand that's out there for us next to our direct sales. I believe we have the pieces in place to move faster. When I talk to advertisers from big to small, they like our new ad stack. They can now buy in more ways, which lowers the friction. They can also measure better. This is the momentum we need to ride on. We're behind on the plan, but we'll move faster. We have high expectations across our business, and we need to see more progress within Ads. Unfortunately, that hasn't happened here, so we felt it was the right time for a leadership change. That said, we think highly of Lee. He's done great things for Spotify in the last 6 years, but right now, we need to accelerate the transformation of this business.

Okay. We've got another question from Jessica Reif Ehrlich on engagement. What metrics or color can you provide on engagement and how it's grown by category over the past year? How do you view the opportunity to monetize this highly engaged base? Is it conversion to premium advertising or something else?

Thanks, Jessica. This is Gustav. Talking a bit by category, we've already mentioned several metrics around market share in music subscriptions. Both Alex, Daniel, and I have talked about the growth in video. We're very happy with what we're seeing in audiobooks as well. We have over 400,000 books now. We recently launched in Germany, Austria, Switzerland, Liechtenstein. We've also released our first add-on subscriptions for the U.K., New Zealand, Australia, and Switzerland. We're seeing growth in all these categories. To your question of how we monetize them: Daniel mentioned one avenue of conversion to premium ads, but we're also pursuing something else, which could be a la carte. Right now, we're doing all of them. As Alex said, when we feel it's the right time, we may make price raises on premium, and that's one vehicle. The second is through advertising, and the third is a la carte.

Okay. We've got a question from Deepak Mathivanan on operating expenses. Realizing the timing shifts on the second half OpEx this year, how should we think about expense growth for the next few quarters? Are there any areas of incremental investments in headcount, marketing, or technology that you currently anticipate for 2026?

Yes. The most important thing to realize is we're not at a steady state in the business world, I think, for anyone at the moment. There's a lot of puts and calls that are happening. I wanted to take a moment to address that principle and underlying change. The most straightforward thing for investors to see is that there's a trade-off between headcount-driven expenses and compute-driven expenses that is more and more being played out now in every company, including Spotify. We're seeing our engineers now asking how much compute they can actually use as they run internal tooling or for new products they're developing. This will mean that businesses are early on in figuring out how it's going to play out. We're focused on driving the lifetime value metric that I talked about, which includes the trade-off between short-term and long-term investments. If there are long-term investments, they should be discounted back, but if it makes sense to do, we should do it. For example, one of the ways we measure marketing is SAC to LTV ratio. SAC stands for subscriber acquisition cost, and LTV is lifetime value. You can imagine the SAC to LTV being 2:1 will elicit one type of response, but if it goes to 5:1, meaning for every dollar we invest, we get $5 back. If you're an investor, you should feel happy for us to invest regardless of short-term expense impacts. Expect more efficiencies as we leverage better tools, but sometimes the right action is to actually spend more in the short term to then get it back in the long term. We will always focus on what’s right to grow the franchise over time.

Daniel, do you mind if I try to jump in here and make the picture even more complete?

Sure. Go for it.

The business has really never been in a better position. All signals are pointing in the right direction. We've got great subscriber growth, as we've discussed at length. User engagement is growing, and people are spending more time on Spotify. We're gaining market share around the world. All levers for growth are available for us to pull. We're happy about our position in the market, and we're not going to rest on our laurels; that's how we think about investing to build an even better Spotify for the future.

Okay. Our next question is going to come from Eric Sheridan on video. How should investors think about the company's efforts to scale video content in the second half of 2025 and beyond? How critical is video to the company's broader efforts to drive advertising growth more in line with digital ad industry growth rates?

This is Gustav. I'll start answering this. I want to zoom out and say how you should think about the video bet itself. Spotify has always followed our users around. They started with music, then podcasts, then audiobooks, and now video. That doesn't mean it's critical; it's just very exciting. We're a resilient company doing well. I want to approach video as an opportunity rather than a threat. We're excited about it.

Okay. We've got time for a few more questions. The next question comes from Rich Greenfield regarding pricing. If NBC's Peacock can increase prices by 38% despite limited engagement, why can't Spotify implement price increases more quickly in developed markets where there is strong daily engagement?

We've approached the framing that we use internally, many times during these calls about value-to-price and how we obsess over value-to-price ratio. We've always put subscribers on a pedestal, and that's what you're seeing play out; user growth is surprising even our internal measures. Pricing is one tool, and we will use it. We take a portfolio approach, and we look at different markets. Even developed markets are different from one another depending on how much value we have there and engagement. We've raised prices recently, and we've seen a very strong retention profile on those price raises, so we will use it again when we feel it's appropriate for the business.

The biggest thing to realize as you're operating a subscriber service at scale is managing for retention. It's better to keep the customer around for a longer time than to lose them and then try to reacquire them later. At scale, the subscription business is really around retaining customers, not acquiring new ones.

Okay. We have a question from Richard Kramer on the Ads business. We've now seen a full year of single-digit growth in ad-supported sales constant currency, while competition is reporting faster growth rates. Is the Advertising business really core to Spotify?

Of course, it is or we wouldn't be in it. 2025, as we mentioned, is a year of transformation for the business. A good proxy for whether it's going well or not is the adoption from advertisers. The tools we built have been adopted by them, and we're seeing demand-side platforms being added. We're also increasing our direct sales with new formats. Just need to move faster; that’s what's at stake here.

Okay. And our last question today is coming from Deepak Mathivanan on large language models. Can you talk about how Spotify is leveraging the advancements in LLMs with reasoning capabilities over the last 6 months into the core product experience? Beyond recommendations and curation, where do you see opportunities in the long term? What are the investments Spotify is making?

Thanks, Deepak. This is Gustav. I've already talked about examples beyond recommendations and curation: you can now talk or text to Spotify, which gives us a completely new dataset. We're retooling the entire company and technology stack for the generative age. We wrap APIs and something called MCPs, model context protocols, to create agentic infrastructure on top of all your older tech infrastructure to create a product on the fly by writing in English. The reasoning I mentioned earlier is the opportunity. There was a difference between the non-generative AI age and generative AI age, wherein generative AI, user experiences will become more interactive. We can predict and reason over users' listening histories and what they say, meaning experiences will change significantly in coming years. I can't share specifics, but I think that we are in a good position because we have engagement.

All right. Great. Thanks, everyone, for the questions. That concludes our Q&A section of the call. I'd like to turn it back over to Daniel for some closing remarks.

Thanks, Bryan. It's been a great first half of '25, and we're focused on delivering a strong finish. The business is healthy and well-prepared, and I believe we're in the best position we've ever been to capture the opportunities ahead. Thank you for joining us today, and I look forward to chatting with you again soon.

Okay. And that concludes today's call. A replay will be available on our website and also on the Spotify app under Spotify Earnings Call Replays. Thanks, everyone, for joining.

This concludes Spotify's Second Quarter 2025 Earnings Call and Webcast. Thank you for your participation. You may now disconnect.