Earnings Call Transcript
Spotify Technology S.A. (SPOT)
Earnings Call Transcript - SPOT Q3 2022
Operator, Operator
My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spotify Third Quarter 2022 Earnings Call. I would now like to turn the conference over to Bryan Goldberg. Please go ahead.
Bryan Goldberg, Moderator
Thanks, operator, and welcome to Spotify's Third Quarter 2022 Earnings Conference Call. Joining us today will be Daniel Ek, our CEO; and Paul Vogel, our CFO. We'll start with opening comments from Daniel and Paul and afterwards, we'll be happy to answer your questions. Questions can be submitted by going to slido.com, S-L-I-D-O.com and using the code #SpotifyEarningsQ322. Analysts can ask questions directly into Slido, and all participants can then vote on the questions they find the most relevant. 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 letter to shareholders 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 letter to shareholders, in the financial section of our Investor Relations website and also furnished today on Form 6-K. And with that, let's turn it over to Daniel.
Daniel Ek, CEO
All right. Hey, everyone, and thank you for joining us. I hope you had the time to review our results. As you can see, it was another solid quarter. User growth and subscriber growth keeps humming along very steadily. I've said it before, but it can't be understated: top line growth in the platform is the leading indicator for future success on all other financial metrics. But I want to start by addressing the macro environment, which I know is top of mind for all of you. There's a lot of global uncertainty. But for Spotify, our business continues to perform very nicely around the world. Outside ads, we aren't seeing much impact at all. The ads business is still growing and will be important, but it remains a relatively small portion of our overall revenue to date. So if you recall, at our Investor Day in June, I said that I suspect many of you think Spotify is a great product, yet at the same time, you may also think that we're a bad business or at least a business with bad margins for the foreseeable future. Our Q3 results clearly show that our investments in the product and experience have resulted in strong user growth, retention, and increased engagement, but they've also been a drag on near-term margins. Just to remind everyone, this is all consistent with the strategic decisions we communicated in early 2021 and again at Investor Day. So as we've said, we expect this drag on margins to start to reverse in 2023. As I also shared at Investor Day, LTV, the lifetime value of a user, is the primary tool we use to inform our business decisions and judge whether our strategy and investments are working and achieving better outcomes. The beauty of LTV is that it factors in the longevity, quality, and value of the relationship we have with the user. It is a critical metric to all teams at Spotify. We are constantly experimenting with what leads our users to stay longer, engage more deeply, and ultimately convert to our paid offerings. What we've seen time and time again is how sticky our users are because of the product and experience that we've created. I believe we have the lowest churn across our competitive set because of the many ways we keep listeners engaged and happy, and therefore, retained. Because of the strength of this relationship, we know that spending to acquire new users is a worthwhile investment that over time will have a meaningful return. So here's how we think about it: this trade-off is worth making if our actions result in an increase in lifetime value of a user, and we also maintain a healthy customer acquisition cost-to-LTV ratio. But I also want to reiterate that we're keenly aware that this is an uncertain time and the cost of capital has increased. So inevitably, you should expect our hurdle rate for new investments to be higher. Consequently, you should also take this to mean that we will be more selective with our overall spending moving forward. We will make new investments with two criteria in mind. First, it must be accretive to margin over the investment period given this new hurdle rate. Second, over the long term, that investment must strengthen our value proposition to users and creators alike. This said, new opportunities will likely emerge in downturns. As an example, we may find that our customer acquisition cost goes down as the cost of advertising typically declines in a softer market. This would then offer us a clear opportunity to grow our market share even in a challenging economy because we can acquire users at lower cost relative to LTV. We saw this dynamic play out in the beginning of the pandemic, and we benefited from it. We expect we will do so this time around should the opportunity present itself as well. This philosophy is not new for those that have followed us for a while, but I realize that this may frustrate some of you who would prefer we manage to the quarter. Some companies do just that, and I get that's what some investors look for, especially now in this show-me market. But simply put, I don't think that's a winning strategy long-term nor is it the right one for Spotify. We've been transparent that 2022 was going to be an investment year, which would result in a drag on our gross margin in the short term. This quarter is case in point. But it shouldn't come as a surprise that nothing really has changed with our fundamentals. Our business is strong. We are heading into 2023 with more cost certainty, stronger product, and a better user proposition. This is all playing out largely as we expected despite the macro environment. Our confidence in our ability to meet our long-term goals and the ambitions we laid out at the Investor Day remains unchanged. Based on the strong demand for our platform amongst consumers and creators this quarter, I believe we will deliver. With that, I'll hand it over to Paul to go deeper into the numbers, and then Bryan will open it up for the Q&A. Thank you.
Paul Vogel, CFO
Great. Thanks, Daniel, and thanks, everyone, for joining us. I'd like to add a bit more color on our operating performance, highlight what we're seeing with respect to the macro environment, and touch upon our outlook. Starting with our strong user performance, total monthly active users grew to 456 million in Q3. This was the largest Q3 net additions in our history. Excluding our exit from Russia, our year-to-date net additions are at a record high, and we expect this to sustain throughout year-end. Moving to Premium. We finished the quarter with 195 million subscribers, 1 million ahead of guidance, thanks to broad-based strength across regions, particularly Lat Am. Our revenue grew 21% year-over-year to just over EUR 3 billion in the quarter. This was slightly ahead of guidance driven mostly by foreign exchange. Our advertising business grew 19% year-on-year and was led by strong double-digit gains in our podcasting business. While this overall result was a bit below expectations, we continue to see encouraging signs that our ad strategy is working despite some of the near-term macro headwinds and particularly the continued strength and interest in SPAN. Turning to gross margin, gross margin of 24.7% was below guidance by 50 basis points. There are three factors that contributed to the results and in order of significance. First, the expected renewal of a large publishing contract outside the U.S. resulted in an accrual adjustment this quarter. The adjustment reflected revised estimates spanning the previous nine quarters. While the amounts were immaterial in any single quarter, taken together, they added up to a material impact in Q3. Second, like many, we did experience some impact to the top-line advertising growth from the macro slowdown, and this shortfall had a modest impact on margin. Third, currency fluctuations, mainly the continued strength in the U.S. dollar, had a small impact on the cost of revenue. Historically, currency has had a big impact on operating expenses and a somewhat minimal impact on the cost of revenue. However, given the significant strength of the dollar, it has started to impact gross margin as well. Taking a step back, we don't see anything in the results to change our view of the margin potential we laid out at Investor Day. Importantly, we view the publishing renewal in this quarter, along with the recent proposed settlement related to the U.S. CRB on Phonorecord's IV rates, as very positive developments. They offer greater cost visibility, and taken together, these two deals are consistent with the profitability targets we communicated to you at our Investor Day. Looking at operating expenses, growth in the quarter was slightly lower than forecast on a currency-neutral basis. However, currency fluctuations proved greater than planned. When combined with our modest variance in gross profit, our operating loss was slightly below guidance. Currency continues to be a big impact, adding $85 million to operating expenses or just over 14 percentage points of year-over-year growth. Touching on free cash flow, we generated our tenth straight quarter of positive free cash flow. We continue to generate roughly $200 million in free cash flow on a trailing 12-month basis. Given the timing within quarters, we may see free cash flow turn negative in Q4, but we still expect to be free cash flow-positive for the year and moving forward. Turning to our outlook, as Daniel said, we continue to monitor the global macro environment. To date, we have seen no material impact outside of our ads business. When we began 2022, we said that we expected to see MAU and subscriber net addition growth at roughly similar levels to 2021. As we enter the fourth quarter, we now expect MAU net additions to finish materially higher by year-end, and we see subscriber growth roughly in line with those expectations, excluding the impact of Russia. With respect to Q4 ARPU, we expect it to be up mid-single digits on an as-reported basis. On the advertising front, we are seeing some modest improvement from where we were a month or two ago, but the macro environment still has a reasonable amount of uncertainty. As such, we expect another quarter of decelerating growth in Q4, but we continue to remain confident in the long-term potential of the business. Our gross margin outlook for Q4 is 24.5%. We recognize this is likely a bit below what many of you have been expecting based on our commentary, exiting our Q1 results for a gross margin of around 25% for the balance of the year. The variance between these figures is primarily a result of three factors. One, including the softening macro environment over the course of the year, which is reflected in the current advertising slowdown. We also see another quarter of negative currency exposure. Last, Q4 includes a restructuring charge at our podcasting business, which should lead to improved productivity at select studios on a go-forward basis. All in all, we anticipate approximately 70 basis points of impact from these three items with the impact spread roughly evenly across each. In closing, despite an uncertain macroeconomic environment, we continue to be highly encouraged by the overall trends we have seen year-to-date. We laid out a vision for our business model expansion at our Investor Day, which we firmly believe we will execute against. This year has been one of investment, hitting both gross margin and operating expense. While it's too early to provide any guidance with respect to 2023, we expect our profitability rates to improve relative to 2022 as we grow revenue, lap certain investments, and deploy capital more efficiently.
Bryan Goldberg, Moderator
All right. Thanks, Paul. Again, if you've got any questions, please go to slido.com #SpotifyEarningsQ322. Our first question today is going to come from Matt Thornton on pricing. Can you update us on your thoughts around pricing given the recent increases at Apple Music and YouTube Family? And then secondarily, is there any update on Hi-Fi as either a feature or a separate Premium plan?
Daniel Ek, CEO
Yes. So this is Daniel. So maybe just by way of context, in the last two years, we've actually done more than 46 price increases in markets around the world. I mentioned this on earnings calls before, but the results from these have been conclusively the same, which is it's been as good as we would have hoped for, if not better, in many of these places. Take that to believe that we have significant pricing power on this, and we’re offering an amazing consumer value proposition. And that just keeps improving with our improvements in the service. So I think when our competitors are increasing their prices, that's really good for us because, again, with our deep engagement that we have and the lowest churn of any competitor, we will likely fare better. So we're set up super well for the coming years. In specific, regarding the U.S.-based price increases, it is one of the things that we would like to do, and this is a conversation we will have in light of these recent developments with our label partners. I feel really good about this upcoming year and what that means in pricing in relation to our service.
Bryan Goldberg, Moderator
All right. Next question is going to come from Doug Anmuth on gross margins. How confident are you in 2022 representing a near-term trough on gross margins with inflection in 2023 as laid out at the Investor Day? What are the key drivers? And is there anything that could derail that trajectory?
Paul Vogel, CFO
Yes. So at a high level, we still remain very confident with the margin profile and margin guidance we gave at the Investor Day. We said a number of times that 2022 was going to be an investment year. You've seen it show up in both gross margin and on the operating expense line, and we expect to see improvements as we move into 2023. We've talked about particularly things like podcasts that have been a drag, and that should turn into less of a drag and then eventually a benefit moving forward. Nothing has changed at all in terms of our expectations there. Obviously, there's some macro uncertainty. So the speed of that turnaround could always be impacted by a quarter or two or at least the slope of that turnaround. When you look at the guidance we gave in terms of when we think we could break even and the impact of something like podcasts over the long term, nothing has changed at all in terms of our expectations. We still feel really good about it. Obviously, the macro could impact a little bit the overall speed of that trajectory, but we don't see anything impacting where we're headed at all.
Daniel Ek, CEO
Yes. And maybe my additions to that. If you really separate it out from the business standpoint, you can think about it as two major parts of the business at the present moment with more being developed with audiobooks, etc. So the two major parts are obviously our music business side and then it's our podcasting business side. As Paul said, on the structural side, on podcasting, we believe that to be a much higher gross margin business than the one we're currently in the music, simply because the way to mimic that would be to look at platform-type businesses that usually end up having a higher gross margin than normal services. And then on the music side, regarding any pricing, so any pricing we would do would be accretive to that business too. As mentioned, we've been selective in doing that during the pandemic and macro environments, and we'll do so opportunistically, too. But if you think in light of our competitors raising prices, that obviously gives us more confidence going into it too. We're very bullish long term that we'll get these numbers that we outlined during Investor Day.
Bryan Goldberg, Moderator
Okay. Next question from Mario Lu. You recently launched your own site to sell tickets to live events. How is it performing versus internal projections? And does this move the needle for the roughly $200 million of Marketplace revenue expected in 2022 and healthy double-digit growth in 2023 given at the Investor Day or was it already embedded?
Daniel Ek, CEO
Yes. I'll start with this one, and maybe Paul can add to it. So first, I actually think they're kind of conflating two parts. Marketplace does not include the Live business, just to set the record straight there. We feel really good about the Marketplace business and how that's developing. We feel really good separately to that of the Live business, although it's very early days. So lots of experimentation of just enabling more ticketing to be available across Spotify. That ticketing in turn has driven better results. So more people are seeing more tickets, and therefore, as they're seeing more tickets, conversion rates and overall ticket sales have improved too. It's early days. I can't disclose any numbers just yet, but we feel encouraged by that part. Regarding the numbers we gave around Marketplace, that's completely separate from that, but we feel really good about where we are with the Marketplace business.
Paul Vogel, CFO
Yes. Nothing I'll say other than the Marketplace has sort of been trending in line with the expectations throughout the year.
Bryan Goldberg, Moderator
Okay. Next question from Rich Greenfield. Daniel, you appear increasingly frustrated with Apple. What would you like to see them do that they are not allowing today? Can you give us a couple of examples of issues that are problematic for Spotify? Also, can you update us on the Google Play partnership from earlier this year?
Daniel Ek, CEO
Yes. Sure, Rich. So really, at the core of this is the same argument I've been saying now for about four years, which is our view is that this is the next great battle from net neutrality to what I call the platform neutrality wars. The key part that we want to do at Spotify is we want to have the ability to communicate with our customers the way we choose to do that and the way our customers are accepting to have that line of communication. We do not want a gatekeeper or a monopoly to dictate how we communicate with our customers. The second part is we think that there ought to be payment method choice by this. So really allow us to use whatever payment method we think is the optimal one and that the customer wants to use. And that's important. And the last part is having the same access. If you are a platform that offers a competing service on that platform, we want to have access to the same level of APIs that you would offer your own service. Those are the three big things. There’s a New York Times article that I would just highly recommend all of you on the call today to read. I think it highlights again what's happening there. But the short gist of it is Apple keeps putting up roadblocks, stopping us more and more. I think the app was rejected three or four times at present moment, really despite us having lawyers in the room to ensure we were compliant with this. They keep moving the goalposts, which is exactly what we've said all along. If you contrast that to trying the same experience now on an Android device and on Google, it is a beautiful experience. This showcases that we can build an amazing audiobook experience. However, on iOS, the purchasing flow is inherently broken because Apple decidedly wanted it to be broken. It's absurd, frankly, that they're allowed to keep doing this. Yes, I'm probably more vocal about it because it's insane that it's taken us four years to get resolution for something that's just absurd and holding everyone back. It holds developers back, it holds creators back, and it's bad for consumers.
Bryan Goldberg, Moderator
Okay. We've got another one from Doug Anmuth. Can you detail the drivers of softer gross margin for Q3 and your 4Q outlook? And what changes in 2023?
Paul Vogel, CFO
Yes. Sure. I'll kind of recap with maybe some detail what I said in my prepared comments. In the third quarter, there were a couple of things that impacted the business, and I'll say them in the order of importance. The first was the reversal of an accrual. As many of you know, oftentimes, we have relationships with our royalty partners. Sometimes, those contracts expire. As we are negotiating new contracts, we estimate as best we can what we think the expenses we need to incur during that period of time. Normally, and in most cases, we're always very conservative. In most cases, it results in us actually getting a slight benefit when we settle the contract. In this case, it was a very modest impact. The reason it mattered in this quarter is because the contracts have been expired for over two years. It was nine quarters worth of small adjustments over those quarters that we had to take in this quarter. So that was the biggest one. The second, as I talked about, was some of the ad softness. Again, it wasn't too material, but the ad softness did have a small modest impact on gross margin and the same thing with currency too - again, not something we normally call out as part of gross margin. In this quarter, the currency moves were significant enough to impact it. Just going back to the first point, I would say that we feel really good, as I said in my comments. Phonorecord IV as well as this international agreement. A lot more cost certainty as we head into 2023, and that cost certainty is consistent with the model and the outlook we gave you at the Investor Day. So we feel really good about all of that. With respect to the fourth quarter, there are a couple of things in there. Again, these are probably all in equal amounts, but the ad softness again, relative to some of the investments we made, will have a little bit of an impact there. Currency, again, in 4Q and also, as I said, there’s a one-time restructuring charge for some of the changes we made in our podcasting business a month or so ago. That charge will hit Q4, which runs through the cost of revenue.
Bryan Goldberg, Moderator
All right. We've got a question from Jason Bazinet. Can you please describe the two or three primary levers you believe will allow you to expand gross profit margins 300 to 500 basis points over the next few years?
Daniel Ek, CEO
Yes. Jason, it's really just a reiteration probably from much of what I said during the Investor Day. I highly recommend you take a look at that. In essence, when you look at it, our music business has continuously improved its gross margin. However, we have invested in non-music content quite substantially over the past few years, which meant that we were kind of at a level where it looked like our top line gross margin hasn't moved much at all in that process. We believe we can keep expanding our margin on the music side. This heavy investment in the podcasting side is going to reverse in 2023 as it starts moderating. As I said, structurally, as the revenue mix shifts to more and more non-music content - both podcasting but also audiobooks, etc. - those gross margins in those categories will be significantly higher than the ones we've had in the music business too. This will be a net positive as more of the revenue starts shifting to those categories and that adds up to the gross margin improvements that you're talking about and then some when you look at the sort of long-term improvement.
Bryan Goldberg, Moderator
All right. Another one from Rich Greenfield, this time on competition. The elephant-in-the-room question is TikTok expanding to more markets as they hire music industry executives. Curious how you think about the threat given TikTok's importance in A&R and music discovery and how Spotify is positioned.
Daniel Ek, CEO
Yes. First off, like many other technology founders, I'm very impressed with how TikTok has been executing. It's been formidable to watch their growth and how well they've been executing throughout the year. We take it very seriously when we look at that. Now that said, we have been in markets with resilience for quite some time, and we've seen considerable growth in those markets. I feel really good about our competitive position as it relates to that. Yes, we know that they're investing in it. When they've taken share, they haven't taken share from us. It's been from others. We keep watching it, however. The key, again, is the only real competitive advantage, I think, in tech, is to move faster than everyone else. This is part of the reason how you should look at our backdrop of investing so much as we have done in this past year because we want to move faster. I mentioned this in the last earnings call, but the number of experiments that we do, the number of product improvements that we do each quarter is a metric that I look at as probably the most important leading indicator for long-term success. This makes me feel good because we’ve really improved our product velocity over this year. You will certainly start seeing a lot more of it coming into 2023.
Bryan Goldberg, Moderator
Right. Next question from Doug Anmuth. What does the Spotify machine look like in five-plus years? What gives you confidence that Spotify can have as much success with audiobooks and other products as it has with podcasts?
Daniel Ek, CEO
Yes. Sure. First and foremost, just as a reminder for people, the Spotify machine is really a framework of how to think about Spotify, where the predominant way to think about it is that it's one user experience shared across many verticals of content. What that enables us to do is to leverage all the key technology, so all the pillars that we built Spotify throughout the year: freemium, personalization, ubiquity, all of those facets. This also enables us to take the scale of the existing audience base and cross-sell to new verticals to gain ground faster. When you look at it from music to podcasting, the reason why we've been so successful is because we've been able to upsell people who never listened to podcasts before to start listening on Spotify, and that got us to the #1 position in podcasting. Our belief when you look at the audiobooks market is that while books is a pretty big industry, audiobooks is still a niche offering only enjoyed by tens of millions of consumers around the world. Audiobooks should be something that should be enjoyed by hundreds of millions of people, if not billions of people, around the world. So to grow that market is key for us. The Spotify machine is our ability to do that - we're investing in better freemium experience, better personalization, better ubiquity experience that then benefits more and more of these verticals. You should expect us to add more of these verticals to get to a double whammy. I actually think about that as an analogy to B2B business sides, where the hard thing was to get distribution and get the customers in the door, but then a Salesforce added more products to leverage that existing distribution channel. Think about the Spotify machine as our ability to do that, leveraging the distribution we have to consumers. So there are plenty of opportunities to expand in the coming years.
Bryan Goldberg, Moderator
All right. Next question from Batya Levi on podcasting. Can you provide more color on podcast engagement and your expectations to reach profitability in this part of the business?
Paul Vogel, CFO
Yes. Podcast engagement has been strong. We've seen podcast MAU as a percent of our total MAU continue to increase. It was up again in Q3. Podcast consumption per podcast MAU is also up year-on-year. We’ve seen strong trends in general across all of podcasting. As we continue to build out the tools and services to monetize, continue to expand the audience, and continue to grow reach, we feel like we're right on track with our ability to generate the profitability that we mentioned earlier on the call and also at the Investor Day.
Bryan Goldberg, Moderator
All right. Next question from Deepak. Your fourth quarter guidance implies Premium subscriber net adds of 22 million for 2022 versus 25 million in 2021 and 31 million in 2020. What's the right way to think about annual net sub adds for 2023 and beyond?
Paul Vogel, CFO
Yes. Let's first look at 2022. Keep in mind that number includes Russia and the impact of us exiting Russia. When you look at it more on an organic year-over-year basis, 2021 and 2022 are very similar in terms of net additions. You just have to back out the impact of our withdrawal from Russia, which was impactful. Second, we haven't given any guidance on 2023 yet. We'll do that in our next quarter call. We feel really good about the subscriber growth we've had this year. If you back out Russia, it's right in line to even slightly better than our expectations.
Bryan Goldberg, Moderator
All right. Deepak's got a follow-up on gross margins. Can you unpack the gross margin expectations between Premium versus ads in the fourth quarter guide? And importantly, how should we think about the Premium gross margin expansion in 2023?
Paul Vogel, CFO
When you look at what we've reported, obviously, we talked about overall gross margins, but any overall weakness or softness in Q3 on the ads revenue side is going to impact the ads business from a gross margin perspective, and they won't hit the Premium side. Most of the other impacts on consolidated gross margin will be evenly distributed across both. As we look into 2023, I'll just reiterate what I said: 2022 has been an investment year. We’ve had a couple of things in Q3 and Q4, which I've identified, that have impacted Q3 and Q4 gross margin. We look at 2023 as a year where you'll see the dynamic of revenue and cost growth start to reverse. As Daniel mentioned, we're continuing to look at how we greenlight and deploy our capital. We still feel really good about the long-term model and the profile we gave you at the Investor Day.
Daniel Ek, CEO
My only addition is, as we said at Investor Day, we were expecting margins to improve in 2023, and that's a function of us growing revenue faster than we're growing content costs. That's been our plan all along for 2023 and being consistent with what we've been communicating before.
Bryan Goldberg, Moderator
All right. Next question from Eric Sheridan on the ad market. Can you talk about the current state of trends that you're seeing with respect to audio digital advertising, especially any nuances by type of advertiser or geographic impacts? Also, anything on exit velocity to the ad business in September that you can share?
Paul Vogel, CFO
From a geographic perspective, we saw the softness mainly in EMEA, a little bit in North America, but we saw it in EMEA. Obviously, the war and the economy have impacted those businesses. Even in places like the U.K., we had some paused advertisements for a week around the Queen's passing, which also impacted our business. We definitely saw it mostly there from a geographic perspective. In terms of exit velocity, when you look at October, it's a little bit of a nuanced answer. We had seen some trends moderate throughout Q3. If you look at where we were a month ago to where we are now, the October numbers look a little bit better than where we thought they'd be a month ago, but there’s still uncertainty in those numbers.
Daniel Ek, CEO
Paul, you should probably mention what you told me before about the uptake from advertisers.
Paul Vogel, CFO
It's a great point. One of the things that we look at to monitor the health of the advertising business and discern between what's macro and what is structural is when you look at SPAN and the number of advertisers that are participating in SPAN, that continues to move up. Even though the macro may impact how much they're spending in any one period of time, when you look at this from a structural standpoint, we feel really good about what we're offering and the number of advertisers participating in that ecosystem. The fact that we're seeing that up year-on-year shows us that we believe that the overall structural health of our ads business that we're building at Spotify is very healthy.
Daniel Ek, CEO
My only two additions as context for everyone on the call are, on the one hand, I think as Paul said, the important thing is to decide whether this is cyclical or structural. Our firm view is that this is more cyclical than structural. The long-term growth of digital advertising is still going to be healthy. There’s a move of offline dollars to digital dollars. In regard to audio advertising, I think we are in a great position because relative to the competitive marketplace, there’s a lot of services that offer video advertising and display advertising, which is competition. If you want to advertise via audio, in this case, if you want to reach customers in the car or while they're commuting, that’s just one example, or on the go, on mobile devices, Spotify is the place to advertise for them. We sit in a different bucket than an advertiser considering spending a video dollar, as there are many places to do that. For ads, it’s just a small part of our business now. Any headwinds in the advertising business for us impact us much less than it does for platforms that solely rely on ads. When you think about our product road map, I expect platforms that have to realign their product road maps to be impacted quite a lot by headwinds. It impacts us less when there are headwinds.
Bryan Goldberg, Moderator
All right. We've got a question from Steven Cahall on pricing. When you think about price increases, how do label terms impact your thinking? Is there scope to align interest by agreeing that incremental pricing will be a lower share of royalties so you and the label share in the upside?
Daniel Ek, CEO
Yes. I mean, I can't comment on the specifics on any of the label terms. Any price increases that we choose to do should be net-net a win-win for both parties. That’s definitely part of any conversations when we're talking about pricing with our label partners, as you could imagine, even in the past and in the context of the 46 price increases we've already made.
Bryan Goldberg, Moderator
All right. Next question is coming from Benjamin Black. Could you talk about the launch of audiobooks, what the early takeaways have been or any feedback you can share? How do you envision evolving the product from here?
Daniel Ek, CEO
Again, it's super early days. The really healthy metrics for me are engagement and retention among the audiobooks purchasers that we're having, and that looks very solid. It's early but good engagement overall. We see it being additive to all the other engagement happening on the platform, which was our hope. It's nice to see that being played out. That said, the purchasing experience, particularly on iOS, has been below expectation on our side. That's something that we're working on trying to improve. I feel good about where we will end up in 2023, and that will allow us to scale. We kind of knew this was a possible scenario and we've been planning for that, but I'm disappointed in all the Apple back and forth.
Bryan Goldberg, Moderator
All right. Our next question is going to come from a participant. What needs to happen for Discovery Mode and the two-sided marketplace to take its next step and continue to expand Premium margins?
Daniel Ek, CEO
Overall, it's really two parts of this two-sided part. One is demand, and the other one is obviously supply. More artists, more releases participating helps on one side, and then more inventory, high demand from consumers, and seeing that Marketplace-type product helps with that. It's a constant pulling levers on both sides for us to try to expand that. We’re doing and it's more of the same rather than any major innovation.
Paul Vogel, CFO
The other thing I would add is, within the question implying that the Marketplace isn't helping margins, it's actually helping margins a lot. We’ve just chosen to take some of the benefit from the Marketplace growth and reinvest it in our business, which is why you haven't seen the consolidated gross margin expand. We feel really good about the benefit we've seen from Marketplace and its ability to drive margins in the future. Again, right now, that's just being masked by some of the investments we've chosen to make. Not sounding like a broken record, but kind of what we've talked about throughout 2022.
Bryan Goldberg, Moderator
All right. Next question is going to come from Justin Patterson. Can you discuss how you're thinking about the pace of headcount investment in this environment? Are there opportunities to slow OpEx growth and focus more on productivity?
Daniel Ek, CEO
Yes. As I said in my opening remarks, we're keenly aware that this is a very different macro environment than the one we've previously been in. I know some investors may not think that I care because I'm focused on the long term, but I do. What that means is that cost of capital has increased. When the cost of capital increases, that means the hurdle rate for any new investment needs to increase. Additionally, we had already planned to probably slow down some of our OpEx increases for 2023. In light of this uncertainty, it's even more prudent to take a big look at those numbers and manage that OpEx side better than we have. Paul can probably share more context on that, but I wanted to say that from my side.
Paul Vogel, CFO
Yes. We'll give more guidance and clarity on 2023 on our next earnings call. As I’ve said, you can expect that dynamic of revenue growth and expense growth to flip from where it’s been over the past couple of years. The hope is to start leveraging some of that investment over the next year or two.
Bryan Goldberg, Moderator
All right. We've got time just for a couple more questions here. The next one is going to come from Rich Greenfield. Are there ways to be more innovative on price and functionality on your service besides an all-you-can-eat product for a fixed price?
Daniel Ek, CEO
Yes. The high-level way of thinking about it is Spotify has predominantly, until now, been a subscription, all-you-can-eat service. A few years ago, we started investing in advertising being the other way. You can think about raising ARPUs as a combination of being on subscription or ads. It’s interesting to see how people are blending the two together now on the video side. That might be an opportunity where consumers may not see the price point increasing, but effectively, the ARPU is increasing. That's one. The second part is à la carte to the mix too. You’ve seen us do that a few times now. You have audiobooks, which is bought à la carte. You also have live concert tickets that are now bought à la carte. It’s the three modalities of revenue playing together rather than thinking about us as predominantly a subscription service, even though that’s where the majority of revenues come from today. There’s lots of innovation. I took it to mean ARPU increase rather than price increase over the coming year. There’s a lot more to come there.
Bryan Goldberg, Moderator
All right. We've got time for one more question. That’s going to come from Deepak on podcasting. Can you discuss your return expectations on podcast content investments for 2023? Is the rising cost of capital environment causing you to revisit the planned levels of investment on podcasts?
Paul Vogel, CFO
Yes. I would probably answer this question in a couple of different ways. One is we look at all of our content investment through the lens of returns and the impact on LTV across all of Spotify. We’re going to continue to lean into looking at every investment we make and see if it increases or decreases LTV positively. That’s number one. Second, the cost of capital has gone up. Any investments we make, any continued growth we achieve, the hurdle rate is definitely going to be higher moving forward. We’ll continue to be thoughtful and careful about how we commit our capital. Finally, we are constantly looking at and modeling out the impact of our content investment along with the advertising on top of it as well as any benefits we get to engagement and user growth to make decisions on how much we want to invest going forward. Nothing will change in that sense.
Daniel Ek, CEO
Yes. My only addition to that is, as we said at Investor Day, we were expecting margins to improve in 2023, and that's a function of us growing revenue faster than we're growing content costs. That's been our plan for 2023 and being consistent with what we communicated.
Bryan Goldberg, Moderator
All right. Thank you, Deepak, and thanks, everyone, for the questions. That concludes our Q&A session. I'll turn the call back over to Daniel for some closing remarks.
Daniel Ek, CEO
All right. Well, thank you, Bryan, and thank you, everyone, for listening to today's earnings call. I'll close by saying that with one quarter left in a year that's seen war, a lingering pandemic, inflation, supply chain disruption, and threats of a global recession, I'm really proud of all that we've accomplished and that despite all this, we are where we thought we'd be. There may be more roadblocks than there were in the past, but we are incredibly confident in the course we've charted and in the destination we mapped out for ourselves, and we will be nimble and prudent as the times demand. For more details and context, please check out the For The Record podcast dropping later this evening. Thank you, everyone, for tuning in.
Bryan Goldberg, Moderator
All right. 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.