Earnings Call Transcript - SPOT Q1 2023

Operator, Operator

Good morning. My name is Julian and I will be your conference operator today. I would like to welcome everyone to Spotify's First Quarter 2023 Earnings Call. I will now turn the call over to Bryan Goldberg, Head of Investor Relations. You may begin your conference.

Bryan Goldberg, Head of Investor Relations

Thank you for joining Spotify's first quarter 2023 earnings conference call. Present with us today are Daniel Ek, our CEO, and Paul Vogel, our CFO. We will begin with opening remarks from Daniel and Paul, followed by a Q&A session. Questions can be submitted via slido.com using the code #SpotifyEarningsQ123. Analysts may ask questions directly on Slido, and all participants can vote on their preferred questions. If you cannot access Slido, you can email Investor Relations at ir@spotify.com, and we will include your question. Before we start, I want to highlight the safe harbor statement. During this call, we will make certain forward-looking statements regarding the company's future performance. These statements are based on current expectations and assumptions that involve risks and uncertainties. Actual results may differ significantly due to factors discussed today, in our letter to shareholders, and in our SEC filings. We will also reference non-IFRS financial measures, and reconciliations between IFRS and non-IFRS measures are available in our letter to shareholders, on our Investor Relations website, and provided today on Form 6-K. Now, I will turn it over to Daniel.

Daniel Ek, CEO

All right. Hey, everyone, and thank you so much for joining us. As we open this call, I really can't help but feel a tremendous amount of excitement about the progress our team made this quarter. In fact, this quarter represents our strongest Q1 since going public. Over the last few months, we've celebrated a few significant milestones, including surpassing over 0.5 billion users and reaching more than 200 million subscribers. Further, our user growth exceeded our expectations by 15 million and our subscriber numbers by 3 million. At our scale, it is pretty remarkable to see this level of reacceleration in our user growth, but it is a trend that's been consistent now for over the last five quarters. The last two quarters saw the largest MAU growth in our history. The outperformance was broad-based, meaning growth was pretty evenly spread across every region without a single market dominating. On top of this, we accomplished this level of growth with lower marketing spend. We look at this as a promising sign. But it's too early to draw any conclusions yet. A healthy top line user growth is the leading indicator of our ability to achieve future success on all other financial metrics. When we successfully attract new users, it's only a matter of time before the conversion rate that subscriber increases, which then, of course, drives our revenue upwards over the long term. This has worked exceptionally well for us, and I fully expect it to play out again. Speaking of the long term, I want to spend a moment talking about our approach to investment timelines and the outcomes they can deliver when we stay on course. For those who tuned in to our March Stream On event, we unveiled numerous creator tools and debuted a completely new and updated Spotify experience, including a first-of-its-kind AI DJ. These changes marked the biggest updates to our user experience since we introduced mobile more than 10 years ago. However, this didn't happen overnight; we've been building on these over the last 12 to 18 months, and in some cases even longer. As we shift to rolling out these features across our 184 markets, we're seeing an acceleration in MAU retention and subscriptions. Sometimes our investments manifest themselves immediately, but more often than not, their impact is gradual and takes shape over several quarters or sometimes even years. While we can't anticipate when the benefits will materialize, we do know that our growth is a consequence of our relentless pursuit of learning, iterating and improving. We make strategic investments and wait for the results to compound, proving out the benefits for users, creators, and our stakeholders. By delivering an exceptional experience that is centered on creating value for stakeholders, we see a correlation with stronger financial performance. Our success is not attributable to just one thing, but literally hundreds, if not thousands, of improvements that we're investing in and working on in parallel. This is not to say that every one of them ends up producing the desired outcomes. Over time, the things that do work add up, creating a compounding effect. Think of it as waves of innovation, investment, and improvement. There's an ebb and a flow over time, but it becomes more predictable and produces steadier results. The key, then, is to maintain a long-term focus to help us navigate current short-term uncertainties. Don't let my emphasis on long-term investing lead you to believe that we are rethinking our commitment to driving efficiency. Last quarter, I talked about shifting towards becoming a more efficient company. We've become leaner in the last six months, but this progress is still early in its reflection on our financials. The actions we've taken, coupled with opportunities to reduce spending in areas like marketing, content production, and real estate, should lead to a steady progression of key metrics throughout the year. This makes me even more bullish about the remainder of 2023 and beyond. With that, I'll turn it over to Paul for more detail behind the numbers, and then Bryan will open it up for the Q&A.

Paul Vogel, CFO

Great. Thanks, Daniel, and thanks, everyone, for joining us. Let's start with Q1. User growth was exceptionally strong in the quarter. Total monthly active users grew to 550 million in Q1. This was 15 million ahead of guidance, up 26 million quarter-over-quarter, the largest Q1 net additions in our history and the second largest all-time, only surpassed by Q4 of last year. The strength was broad-based, and we had record Q1 net additions across nearly all age demographics in both developed and developing regions. Moving to premium, we finished the quarter with 210 million subscribers, 3 million ahead of guidance, thanks once again to broad-based strength across all regions. Engagement trends were strong in Q1 with a healthy uplift to year-over-year growth in content hours per MAU across all platforms. We also saw positive trends in our DAU to MAU ratio as well as in churn. Our revenue grew 14% year-on-year, topping $3 billion in the quarter. Results in the quarter were just slightly behind forecasts as premium revenue slightly outperformed, offset by a very modest underperformance in advertising. This marks the first Q1 in Spotify's history where we surpassed €300 million in ad revenue. Turning to gross margin, it was 25.2%, above guidance by 30 basis points. Moving to operating expenses, growth was lower than forecast helped by less marketing spend than planned. When combined with our better gross profit, operating loss was ahead of guidance by €38 million. The better-than-expected results also include €44 million of severance-related charges. Free cash flow was a positive €57 million in Q1. Now looking ahead, we have a lot of momentum coming out of Q1. With respect to second quarter guidance, we continue to see strong momentum in MAU and subscribers. We're forecasting 530 million MAU, an increase of 50 million from Q1, and 270 million subscribers, an increase of 7 million over Q1. We are forecasting €3.2 billion in total revenue, a gross margin of roughly 25.5%, and an operating loss of approximately €129 million. On revenue, the currency translation benefits we've been experiencing for the last six quarters are expected to reverse in Q2, led by the weakening U.S. dollar relative to the euro. As a result, we are forecasting a 300 basis point headwind to growth. Excluding this effect, our constant currency revenue will be closer to €3.3 billion, reflecting our expectation for accelerating currency-neutral growth to 14% versus 13% growth we delivered in Q1. From a profitability standpoint, we continue to expect a steady ramp in gross margins throughout 2023 as well as sequential improvements in our operating loss. One final note: as Daniel mentioned in his remarks, we will continue to be diligent regarding operating efficiency improvements and will be looking at areas such as real estate optimization. During Q2, we hope to finalize some of these decisions, and this could lead to a material non-cash charge during the quarter. We have not included any potential charges in our Q2 guidance, but should they occur, we will break them out during our Q2 earnings report. With that, I'll turn it back over to Bryan.

Bryan Goldberg, Head of Investor Relations

Thanks, Paul. Again, if you have any questions, please go to slido.com #SpotifyEarningsQ123. We'll be reading the questions in the order they appear in the queue, based on how people vote for their preference for questions. Our first question today is going to come from Matt Thornton on advertising. Ad revenue actually reaccelerated in the first quarter, which would seem better than feared. Can you talk to what you're seeing in the ad market, i.e., how it performed relative to your expectations and linearity through and exiting the quarter?

Paul Vogel, CFO

As I said in my opening comments, we're slightly behind on the ad side, about 15 to 20 million or so. The quarter was choppy; again, incrementally throughout the quarter, it got a little bit better. We feel like we have momentum heading into Q2, but it's a little too early to say. Overall, I think we feel really good about our relative position in the ad market and how we performed relative to how the overall market performed in Q1. Again, it was a bit up and down. We missed by a small amount, but nothing really that concerns us in any way.

Bryan Goldberg, Head of Investor Relations

Our next question is going to come from Mike Morris on AI. Use of AI technology to create new music has resulted in concern from artists and rights holders, as seen with the recent fake Drake track. What does Spotify's responsibility in allowing or preventing the distribution of creative music that draws from another artist's work?

Daniel Ek, CEO

Yes. I mean, first off, let's acknowledge that this is an incredibly fast-moving and developing space. I don't think in my history with technology I've ever seen anything move as fast as the current development of AI. Obviously, you pointed out in your question that there are two parts to this. One is our role as a platform for allowing the innovation of creative works, and then how we protect the creators and the artist ecosystem that we care so deeply about. A big part of this is that we have that dual focus, and we take that role of guardian of artist creativity and the support we provide to artists and creators very seriously. We're in constant dialogue with the industry about these issues. It's important to state that there's everything from what you've mentioned, sort of fake tracks from artists, which falls in one bucket, to augmenting using AI to allow for expression, which probably falls in the more lenient and easier bucket. These are very complex issues that don't have a single straight answer on how we take a position. We're in constant discussions with our partners, creators, and artists, wanting to strike a balance between allowing innovation and, of course, protecting artists.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Justin Patterson on operating efficiency. On the fourth quarter earnings call, you framed efficiency as a top priority for Spotify as you've transitioned to a new org structure. How are you measuring your initial progress on speed and efficiency? When can we expect these efforts to roll in more meaningfully to gross margin and operating expenses?

Daniel Ek, CEO

Yes. I'll start, and maybe Paul can add to it. We're early on in our new work structure and working style, but I'm feeling really good about it so far. The leading indicators I look to are really just the speed of decision-making. We've driven more collaboration and speed of decisions now than we've ever had in Spotify's history. But it will still take some time before that leads to actual products and then actual business results. As it relates to that, we still have some ways to go before investors see the output. It's important to note that efficiency is just one part of the equation. The other part is being diligent on what we invest in and what we spend on. Paul, do you want to talk a little bit more about what we're seeing there?

Paul Vogel, CFO

Yes. I would add a couple of things. We've talked about seeing sequential improvement in gross margin throughout 2023, and nothing's changed there. You saw the Q1 number come in, you saw the Q2 guidance is sequentially better than Q1, and we expect that to persist throughout 2023. The same thing on the operating loss; we expect to see incremental leverage throughout the year with the sequential improvement in operating loss as well. We're starting to see it come through on those lines.

Bryan Goldberg, Head of Investor Relations

All right. Next question from Matt Thornton on our subscription business. ARPU was a little lower than expected. Can you talk about what's driving that, i.e., how FX plan mix, market mix, and promotional activity varied versus your initial expectations and guidance? How should we think about ARPU looking forward?

Paul Vogel, CFO

Yes. It's a combination of all the things you mentioned. Clearly, we beat on the subscriber side by 3 million. Some of that upside came from additional growth in our family and duo plans, as well as people coming on promotional. All of these factors impact ARPU. I would say the product mix, meaning more users coming in on family and duo, is probably the biggest driver. Again, it's pretty minor in terms of where we came in on ARPU, and it was generally in line with our expectations, maybe a hair below from an ARPU standpoint, but not material.

Bryan Goldberg, Head of Investor Relations

Okay. Another question from Justin Patterson. This is on our recent product updates. Daniel, could you share any initial learnings on listener and creator reactions to the new user interface? With the new user interface released, how should we think about the pace of product improvements and monetization opportunities going forward?

Daniel Ek, CEO

Yes. To set context, it was a very successful event. We've received massive amounts of feedback from users and creators, in particular, where this was a greater-focused event. Creators have been overwhelmingly positive about the new tools they now have to express themselves and connect with their audience. It's also important to temper expectations; it's probably one of the largest single changes in the history of Spotify. We take that very seriously. For instance, the new home feed we announced is still being rolled out, so most consumers in the world don't yet have access to that. We're rolling it out slowly to ensure we have performance dialed in and can react to feedback. We've already made lots of iterations from user feedback. It will be very successful when fully rolled out, and I feel good about that. But I must educate all investors and analysts that there are product improvements we can't just turn on with a button. Some take multiple quarters to roll out because it's not just a feature but a whole new infrastructure with new instrumentation for our AI tools as well. This is an important piece of infrastructure we are rolling out, and I feel really good about it and the response. Once it's fully rolled out, we can iterate massively on top of that. The focus for the next few months is rolling this out, ensuring it's performant, and allowing our machine learning and AI teams to start iterating on it. Then we'll see compounding improvements for many years, just like I outlined in my initial remarks.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Mario Lu. With regards to the 6% workforce reduction announced earlier this year, is that the final or first round of reductions this year? Should we expect any additional severance charges, other than the €41 million in your operating expense in Q1?

Paul Vogel, CFO

Let me take the second part first, just to get it out of the way. The €41 million is the charge on the operating expense line. There was a total of €44 million overall. There was a small component of severance that hit gross margin. Two numbers have been floating out there, but it's €44 million in total, with €41 million hitting OpEx and that €3 million hitting gross margin. In terms of workforce, there's nothing else in terms of workforce reductions. I'll let Daniel take the efficiency side from here.

Daniel Ek, CEO

Yes. The only thing I'd add is that we've become a lot leaner over the last six months, but this progress is still early in its reflection on our financials. What investors should expect going forward is for us to keep looking for waste that can help us, including reviewing our real estate footprint. We'll continue to review the content deals we've made to see if they're performing and will have much higher hurdle rates for new investments going forward.

Bryan Goldberg, Head of Investor Relations

Okay. A question from Rich Greenfield for Daniel. I would love to hear your perspective on the recent Apple versus EPIC ruling. While being able to message about paying for Spotify off-platform is clearly positive, it appears that the court largely sided with Apple. I'd love to hear more about your recent trip to Washington, D.C.

Daniel Ek, CEO

Yes, Rich. I would characterize it as disappointed but not surprised with the ruling. While it still includes the anti-steering provision, which I think is important and a positive step, I think it's also worth noting that I briefly read through the judge's remarks. I may be incorrect, but I'll try to paraphrase it: the judge referred to a larger conversation happening in Washington about future regulation and stated they were simply making a decision based on existing laws and not future regulation. This is the reason I went to Washington. I believe new laws are needed for this, and the App Store bill, also known as the Ooma bill, is a much-needed improvement. I had great meetings, from both Republicans and Democrats, who were very supportive of the issue and understanding. Many inquired about the gravity of the situation. Just to level set for those not involved: when I started as a 14-year-old entrepreneur, the Internet was a democratic place where anyone could have an impact. Currently, two companies control a significant portion of the Internet, unilaterally changing the rules. In Apple's case, this can prevent us from communicating with customers and hinder their understanding of better marketplace options. On a principle level, I seek a better climate for innovation to foster progress. I want consumers with whom they opt into communication from a company to communicate freely without platform interference. These key points resonated in both the House and Senate, across party lines. I feel encouraged, but it's still early days in the U.S., and we've made more progress lately in Europe.

Bryan Goldberg, Head of Investor Relations

Great. Next question from Mario Lu on gross margin. Gross margins beat guidance by 30 basis points but saw a drag from other cost of revenue. Can you explain what within other cost of revenue was the main drag and if that's expected to continue going forward?

Paul Vogel, CFO

There's a little bit of nuance here. Let me go through it. Throughout 2022 and into 2023, we've seen a steady increase in the 'other cost of revenue' line. A lot has stemmed from streaming delivery and other computing costs that have slowly risen. In Q1 versus Q1, that trend continued to pressure the gross margin negatively. That said, some of the outperformance we saw in Q1 related to that being less of a drag than anticipated, as we started to see efficiencies pay off. While the previous increases persisted, the incremental rise was less due to these efficiencies. We're in a good place going forward with how this will trend.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Doug Anmuth on podcasting. With a decent amount of hit podcast content deals seemingly up for renewal in 2023 and '24, what gives you confidence you can retain exclusive talent while not overpaying and overinvesting?

Daniel Ek, CEO

Yes. You're right to call out the concern about overpaying and overinvesting. What I can say is we're not going to do that. We will be very diligent in how we invest in future content deals. We won't renew the ones that aren't performing, and for those that are performing, we’ll evaluate them on a case-by-case basis. We have sophisticated tools to measure impact on the platform, which helps us understand the relative impact on lifetime value of our subscribers. This allows us to gauge fair pricing. Additionally, being the largest podcasting platform means we have a great opportunity to amortize costs across a larger user base. So relative to someone smaller, we should be in a better position should we want to renew a deal.

Bryan Goldberg, Head of Investor Relations

Okay. Question from Benjamin Black on subscription pricing. Since you haven't raised pricing, are you seeing any benefit from being the lower-cost distributor?

Daniel Ek, CEO

One might think so, given the outperformance in the quarter. It's important to note that the outperformance has been quite broad-based. By way of context, we did raise prices in 46 markets last year; we haven’t raised prices consistently across the board. Even in those markets, we still outperformed. I feel confident in our ability to raise prices over time, and we have ample data to support this. While we may have been slightly aided by our lower-cost provider status, it isn't a primary part of our strategy. We're working closely with our label partners to determine the best timing for price increases. This is a complex negotiation with various variables involved, but when the time is right, we will raise prices. I believe this price increase will be well received as we deliver significant value for our customers.

Bryan Goldberg, Head of Investor Relations

Okay. Another question from Rich Greenfield on advertising. You've talked about advertising revenue scaling to be 20% of your overall revenue. While it's growing faster than subscription revenue, the mix hasn't moved much. How should we think about the timing of getting to 20%, let alone 30% of your revenues?

Paul Vogel, CFO

Yes, Rich. We still feel optimistic about the ability for advertising to grow and be a larger part of Spotify's revenue mix. There are aspects we can control and those we can't. What we can control is to continue building tools, services, measurement, and attribution—all of which will enhance our advertising product. We feel good about the advancements we've made there. However, in the last quarter or two, we've been somewhat impacted by the macro environment. We believe our long-term view of reaching 20% and beyond remains intact, and our focus is on ensuring that product innovation is robust, so when macro conditions improve, we benefit.

Bryan Goldberg, Head of Investor Relations

Okay. Question from Doug Anmuth on AI DJ. Could you give us your thoughts on how AI DJ plays out given your launch of the beta version at Stream On and the subsequent copyright pushback from some major labels?

Daniel Ek, CEO

Yes. It's important to separate AI DJ from the broader AI conversation. AI DJ has received nothing but positive reactions from the industry, while the pushback from the copyright industry or labels pertains to legitimate topics, such as name and likeness rights, copyright ownership, and claims related to uploaded material. We are actively working with our partners to establish a balance that allows for innovation while simultaneously protecting all the creators on our platform.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Michael Morris on subscription pricing. Do you plan to raise prices on any of your current plans during 2023? What are the current considerations for changing pricing?

Daniel Ek, CEO

I can start and then maybe Paul can chime in. As I mentioned earlier, we raised prices in 46 markets last year. I would like to see us do that again in 2023, but we're currently in discussions with our partners about it. The focus is on optimizing growth. There are various ways to achieve that. We can grow the top line user base, which subsequently converts to premium subscribers and then translates to revenue, or we can increase ARPU with a smaller base while still achieving top-line growth. We have multiple options to achieve growth, and the industry is aware of this. Yes, we would like to raise prices in 2023, but it's really a negotiation with our partners.

Bryan Goldberg, Head of Investor Relations

Okay. Another question from Doug Anmuth on Marketplace. How should we think about the outlook for marketplace growth this year following approximately 40% growth in 2022?

Paul Vogel, CFO

Yes. We're still very optimistic about marketplace. It had a strong Q1 and continues to drive engagement with the creator community, who are loving the tools and services. We haven't given a specific target for 2023, but Q1 was strong, and we're optimistic about continuing to advance all offerings in marketplace.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Deepak on podcasting. Can you provide some color on recent engagement trends on the podcast side? Revenue growth is healthy, even as you optimize the content portfolio, but we're curious about recent engagement trends within podcasts.

Daniel Ek, CEO

Yes. Overall, Q1 has been a phenomenal quarter for engagement. Engagement is up more than predicted on nearly every front—retention is higher, the DAU to MAU ratio is higher than before, and actual engagement is also higher. This is true for both music and podcasts. We've seen a healthy upward trend in podcast engagement for many quarters, with both podcast and music acting in great symbiosis to drive an overall healthier user funnel on Spotify. I feel positive about the mix, which is a testament to the great catalog and content portfolio we have for both music and podcasts.

Paul Vogel, CFO

Yes. I'd add that listening hours for MAU were also strong in the quarter, both across music and podcasting. To Daniel's point, many of our engagement metrics really saw an uptick in Q1.

Bryan Goldberg, Head of Investor Relations

Okay. Another question from Doug Anmuth on users. Given the first quarter upside and the first half outlook, how do you think about overall net adds and growth for MAUs and Premium subscribers in 2023 relative to the 83 million and 25 million added, respectively, in 2022?

Paul Vogel, CFO

Yes. We don't provide full year guidance anymore, but implied in the question is where we already are. Thinking about what we've already added between Q1 and our outlook for Q2, we're just over 40 million net additions for MAUs. So we're halfway to last year's numbers through half of this year, and the same goes for subscriber count. If we hit our guidance for Q2, that's roughly 12 million sub additions, again, about halfway to last year. We feel really good about the trends and trajectory for both users and subscribers for Q1 and our expectations for Q2.

Bryan Goldberg, Head of Investor Relations

Okay. Next question is from Deepak on AI. Daniel, can you discuss your thoughts on the opportunities and risks from generative AI, specifically on music creation? Do you think these developments have the potential to materially shift economics towards distribution platforms like Spotify over time?

Daniel Ek, CEO

Well, this is very early days. The pace at which this space is developing is incredibly fast. I've never seen anything like it in technology. That said, I think on the risk side, not just for Spotify but the entire creative ecosystem is the question around copyrights and ownership rights. The entire industry is trying to navigate this and figure it out, and I consider that a risk due to the uncertainty for creators. On a positive note, this could be huge for creativity. The emergence of conversational interfaces allows individuals with no prior knowledge of music production software to create using their voice, instructing AI to make it sound a certain way. This may augment many artists' creative journeys, leading to more music. That increase in music benefits Spotify as more creators on our service improves engagement and revenue. There’s potential for new products where users could create their own music, but it's too early to speculate on those possibilities.

Bryan Goldberg, Head of Investor Relations

Okay. Another question from Rich Greenfield. At the Investor Day last year, you talked about three new verticals to expand beyond music, podcasts, and audiobooks. When should we expect to hear more?

Daniel Ek, CEO

Yes. I don't have anything to announce at this moment but can say that two of the three are progressing very nicely, and a few candidates for the third are in earlier stages. Many of these projects have been in development by teams at Spotify for two to four years before they are ready to announce. We have a good sense of those new ventures, and I'm eager to share more when the time is right.

Bryan Goldberg, Head of Investor Relations

Okay. Question coming from Benjamin Black on advertising. Could you provide an update on the advertising backdrop? How have ad sales trended so far in April? Shouldn't you benefit from easing year-on-year comparisons as the year progresses?

Paul Vogel, CFO

On the second part of the question, yes, the comparisons do get easier throughout the year and will benefit us. Regarding April, we feel like we had some momentum coming out of March, which is positive. However, we experienced choppiness in Q1, so while we're optimistic, we're also cautiously optimistic given the macro uncertainty.

Bryan Goldberg, Head of Investor Relations

Okay. Another question from Doug Anmuth on podcasting. Can we get an updated view on timing for podcasting profitability? When should we expect to see a meaningful inflection in ad-supported gross margins?

Paul Vogel, CFO

No change to what we said. We expect to see podcast losses continue to improve throughout the year, and our targets for breakeven and then profitability remain unchanged. As for ad-supported gross margins, two factors impact this: podcasting is a significant part of that, so as the podcasting loss transitions to breakeven and then profitability, it will help our ad-supported margins. Secondly, we have some markets where our ad gross margins haven't reached the levels in our more established markets, and we're working on bringing parity there. It's a combination of both factors, but the transition in podcasting from being a drag to a breakeven and profitability will be a big help.

Bryan Goldberg, Head of Investor Relations

All right. We have time for a couple more questions, and it looks like Doug Anmuth has a follow-up on operating expenses. You had 36% growth year-on-year in OpEx in the first quarter, with roughly half of that driven by social charge movements and severance. How should we expect that to improve throughout 2023? What are the key areas of leverage?

Paul Vogel, CFO

Yes, that's a great question. Of the 36% OpEx growth, about a third was from social charges, and another 600 basis points from severance. You will see a couple of things. Our headcount year-over-year is still up. Assuming no changes to headcount, those comps get easier as we start to lap the reduction from a few months ago. Q1 year-over-year was tough, but it gets easier going forward. You'll see leverage on the marketing side; we spent a little less than expected while still achieving phenomenal growth in users and subs. We're monitoring that for the rest of the year.

Bryan Goldberg, Head of Investor Relations

Okay. We have a question from Jed Kelly. We're seeing the stock price benefit from strong MAU growth and improving gross margins. If this continues, does this place Spotify in a favorable position to negotiate a 'win-win' outcome with the labels on any incremental price increases?

Daniel Ek, CEO

I don't think the stock price impacts our negotiations with our content partners, so it doesn't have any real influence. When negotiating, it's rarely a single issue. We negotiate a package of different things that can be thought of as bilateral treaties; they take time to negotiate and involve a lot of considerations. We’re ready to raise prices and have the ability to do so, but it ultimately comes down to negotiations.

Bryan Goldberg, Head of Investor Relations

All right. And our last question today comes from Maria Ripps on advertising. Could you discuss and/or rank order what you consider to be the biggest drivers of advertising in 2023? How much of the growth will be a function of improving macro conditions, increased advertiser engagement with emerging formats, greater inventory availability due to recent investments, or anything else?

Paul Vogel, CFO

Yes, there’s a lot to unpack. Our advertising growth includes several factors: our investments in growing sales capabilities in Europe and Rest of World, which we saw in Q1, and we’ve discussed that expense ahead of its benefits. Secondly, as we continually lead with technology innovation—better measurement, attribution, and targeting—we expect to see benefits from those improvements as well. Macroeconomic conditions are a big wildcard, making it difficult to predict. We believe we're building a strong platform that will benefit when macro conditions improve and will continue to outperform even in uncertain times.

Bryan Goldberg, Head of Investor Relations

Thanks, Maria. And that concludes our Q&A session for today. I’m going to turn it back over to Daniel for some closing remarks.

Daniel Ek, CEO

Thanks, Bryan. In closing, this was a phenomenal quarter with significant outperformance, and I continue to feel really good about what we're accomplishing. We closed out 2022 on a high note, and this quarter continued that momentum. More importantly, we see that our long-term approach to innovation is working. As we move forward with an increased focus on efficiency, we're even better positioned to translate these efforts into improved business performance. Thank you for joining us, and feel free to check out our For the Record podcast releasing later today.

Bryan Goldberg, Head of Investor Relations

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.