Earnings Call Transcript - SPOT Q3 2024

Operator, Operator

Good afternoon, and welcome to Spotify's Third Quarter 2024 Earnings Call and Webcast. All participants are in a listen-only mode. As a reminder, this conference call is being recorded. I would now like to turn the call over to Bryan Goldberg, Head of Investor Relations. Thank you. Please go ahead.

Bryan Goldberg, Head of Investor Relations

Thanks, operator, and welcome to Spotify's third quarter 2024 earnings conference call. Joining us today will be Daniel Ek, our CEO; and Christian Luiga, our CFO. We'll start with opening comments from Daniel and Christian and afterwards, we'll be happy to answer your questions. Questions can be submitted by going to slido.com and using the code #SpotifyEarningsQ324. 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 ir@spotify.com and we'll add in your question. Before we begin, let me quickly cover the safe harbor. During this call, we'll be making certain forward-looking statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed on today's call, in our shareholder deck, and in filings with the Securities and Exchange Commission. During this call, we'll also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our shareholder deck in the financial section of our Investor Relations website and also furnished today on Form 6-K. And with that, I'll turn it over to Daniel.

Daniel Ek, CEO

Alright. Thanks, Bryan. And hey, everyone, and thanks for joining us. So we're in LA this week to spend time with creators, and over the next few days, we'll have a couple of announcements that I'm sure will be of interest to you related to our expansion of video on the platform. So more to come on that. But I want to start this call by welcoming our new CFO, Christian Luiga. I know some of you have already met him and I hope the rest of you have the opportunity to do so soon. Christian brings incredible expertise and proven leadership to Spotify, and I'm grateful to have the benefit of his track record. I also wanted to take a moment to thank Ben Kung for the fantastic job he has done as Interim CFO. It's been seamless, which is a huge testament to all that he's brought to the role. As you can see, there's a lot of positives this quarter. Q3 is another standout in what you've heard me refer to as the year of monetization, and we're on track for our first full year of profitability. We outperformed on both subs and MAU. Revenues were in line, and we had significant beats on gross margin and operating income. We also had another sequential and all-time record quarter of free cash flow. Back at our 2022 Investor Day, we set clear goals for Spotify's growth and this quarter marks a key point where we successfully achieved and even surpassed those targets, doing so slightly ahead of schedule. And I think this demonstrates what we've been saying over the past year, Spotify is not just a great product, but is well on its way to becoming a great business. A big thanks to our team for their hard work and dedication in making this vision a reality. Over the past few years, we've continuously modulated our time and resources between focusing on growth and optimizing for profitability. This approach led to our record year in 2023 for MAU and premium additions. However, as the macro-environment shifted, we made the difficult but necessary decision to adjust and focus on our efforts on cost efficiency. And we did this while continuing to transform our business, which included expanding into audiobooks in Europe, launching new subscription tiers, and bringing more video onto the platform, just to name a few. And today's results demonstrate what we've consistently seen, the importance of finding the right balance between growth and reinvestment. So as we head into the year, I'm sure you're asking, what does this all mean for Q4 and beyond? We will close out Q4 just as we started the year, laser-focused on monetization and the underlying fundamentals of our business. Looking at our forecast, we expect to make further progress across all of our key metrics, which sets us up with plenty of runway for growth and profitability expansion in the years to come. But make no mistake, we're not here to merely optimize for today. I am as energized as I've ever been about the current landscape of technology. What's unfolding in AI with all of its knock-on effects is both thrilling and humbling. Moments like this don't come often. They're inflection points where you can either let the opportunity slip by or you can seize it and press forward with conviction. We're choosing the latter, fully committed, heads down, and building for a future full of possibility. So as you think about Spotify in 2025 and beyond, picture a company that operates with the same disciplined management you've seen this year, but one that also has the ambition to seize the opportunities presented by what's happening in technology. In the near term, I see potential for transformative shifts in music discovery and new innovative ways to connect artists and fans like never before. All great stuff for the music industry, which will drive further growth across our core business. And just as we successfully entered the audiobook space, we're committed to making the targeted investments that also expand Spotify into new areas, enhance the platform, and deepen the value we bring to users. And this relentless focus on consistently delivering exceptional value well beyond the price a user pays for Spotify is how we drive sustainable growth for all stakeholders across our entire ecosystem. So, to conclude, our commitment to the long-term goals we shared at Investor Day remains unwavering, but our journey will, as always be defined by bold innovation and relentless pursuit of what's next. And with that, I'm going to turn it over to Christian to share his perspective and then he'll provide more details into the numbers.

Christian Luiga, CFO

Thanks, Daniel, and thanks everyone for joining us. I couldn’t be more excited to join Spotify. I've been on board for just a short time and I'm impressed with the talented teams I met and I see great potential in the product business. I'm looking forward to working together in efficiently allocating our capital and scaling the business towards our long-term goals. Turning then to the quarterly results. Quarter three marked another strong quarter for the business. MAU grew by 14 million to 640 million, and we added 6 million net subscribers, finishing at 252 million. Both MAU and subscriber growth outperformed our guidance by 1 million. Total revenue grew 21% year-on-year on a constant-currency basis to EUR4 billion. Premium revenue rose 24% year-on-year on a constant-currency basis, driven by continued subscriber growth and ARPU acceleration associated with price increases. Our advertising business saw currency-neutral growth of 7% year-on-year, reflecting another quarter of volatile market spending on brand-related campaigns. Moving on to profitability, we're pleased that we have delivered on our intermediate-term gross margin target of 30%. In fact, gross margin came in at a record 31.1%, surpassing guidance by 90 basis points due primarily to content cost favorability. Operating income of EUR454 million also set a new record, aided by gross profit strength. Operating income was impacted by EUR54 million in social charges, which in the quarter were EUR39 million higher than our 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 of our control. Finally, the free cash flow was a record EUR711 million in the quarter, and performance here was driven by our improved operating income profile as well as net working capital favorability. Looking ahead to fourth quarter guidance, we are forecasting 665 million MAU, an increase of 25 million from quarter three, and 260 million subscribers, an increase of 8 million over quarter three. We are also forecasting EUR4.1 billion in total revenue. As you may have seen in today's results, favorable foreign exchange rate movements created a larger-than-expected headwind to the business in quarter three. These movements have also impacted our quarter-four outlook by approximately EUR80 million. We also anticipate gross margin of 31.8% and operating income of EUR481 million, pointing to our first full year of positive operating income of EUR1.4 billion. With respect to subscriber net additions, the very low levels of churn that we expect in the six markets where we've recently announced price increases is also incorporated into our quarter four outlook. This is consistent with what we had seen historically. We have also incorporated our ongoing actions to drive better subscriber monetization. Although new pricing will contribute towards ARPU growth in quarter four overall, we expect the lapping of 2023 year’s price increases that we had in 63 markets that will lead to an approximately 400 basis point moderation of year-on-year ARPU growth on a constant currency basis in our revenue outlook. In terms of our recent gross margin improvement, as Daniel mentioned, we are very pleased with the strides we made this year. The significant rate of improvement in our gross margin in 2024, which exceeded even our own plans, has been exceptional and should be viewed as such. Looking ahead, we see substantial runway to grow margins and income over the long run, which will be driven by continuing focus on improving our product and business via targeted investments, disciplined management, and improving monetization. Finally, on capital allocation, we have a strong balance sheet with EUR6.1 billion in cash and equivalents and EUR1.3 billion in exchangeable debt, and a trailing 12-month free cash flow profile of EUR1.8 billion. As a sustainable growth company, our top priority remains to invest in opportunities that make sense for the business with high returns. We are, of course, considering our shareholders as part of our overall framework. Overall, we are very pleased with the positioning heading into the year end and looking forward to building on our momentum going forward. With that, I hand things back to you, Bryan for Q&A.

Bryan Goldberg, Head of Investor Relations

Today's first question is from Eric Sheridan regarding capital allocation. How are you approaching capital allocation over the next few years as your profitability continues to improve? Can you outline your priorities for allocating capital between growth investments and potential capital returns?

Daniel Ek, CEO

Well, I'm going back to my remark, but also just emphasizing again, it's really amazing and good to start this journey for me and for the company now with a strong balance sheet, which we have. And it is an important and a great question. It's fantastic to see now how we have brought healthy returns in the past and the investments we have made. And I think the main focus is to continue to focus on LTV over SAC ratio. And I believe the investments that we have made in audiobooks and others are those that we should look for going forward, how do we create growth and a sustainable profitability in this company.

Bryan Goldberg, Head of Investor Relations

The next question is going to come from Batya Levi on gross margin performance. Can you provide more color on what drove the gross margin beat versus your outlook? What are some of the drivers for further margin expansion sequentially?

Christian Luiga, CFO

Thank you. The gross margin improved in a way that it was a continuation of quarter two. I mean, we have a very good marketplace program that actually is developing well and has improved the gross margin. We also have streaming and delivery costs and I have to add also payment costs that we are scaling on. And on top of that, we have the US publishing rate favorability that comes through our books. And that is the reason for quarter two and that's the reason for quarter three improvement. And I'm not going to go in that much on future drivers.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question comes from Doug Anmuth on 2025. You've now reached the low end of your medium-term financial targets. How are you thinking about drivers of incremental leverage into 2025, more of the same across marketplace, bundling price increases, podcast improvement, or are there other new initiatives?

Daniel Ek, CEO

I believe it’s a combination of several factors. Looking ahead to 2025, it seems to be a continuation of the trends we've previously discussed. I would also include audiobooks in this discussion. As we approach the later part of this year and into 2026, we are considering new initiatives as well. The narrative of Spotify, as you may know from our history as a public company, has always involved innovation and pushing the boundaries of what our consumers expect from us. We strive to enhance the value-to-price ratio that we frequently mention. Our focus is on consistently adding more value for our consumers because we understand that if we prioritize this, pricing will eventually align as we have demonstrated this year.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question is going to come from Justin Patterson on pricing. The record labels have recently signaled that they expect industry prices to increase. Given the product innovation at Spotify relative to peers, how do you think about setting price in relation to the broader industry? Do you need competitors to raise prices to support your own price increases?

Daniel Ek, CEO

We are very optimistic about Spotify's value proposition and our pricing strategy. In many regions, we are a leading price competitor, which reflects the strong offerings we provide. However, it's important to recognize that all products operate within a competitive landscape, and this isn't an infinite scenario. Our primary focus remains on enhancing the value we deliver to our users and how we quantify that value. We've discussed various metrics like churn rates and engagement, which are essential indicators of our success in retaining users. As we continue to improve our offerings and customer engagement, we will find opportunities to increase our pricing.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question comes from Jessica Reif Ehrlich on advertising. There have been reports that you've built your own ad exchange and can tie into demand side platforms such as the Trade Desk. Can you provide some color on the time to ramp up, how quickly you can scale? And when will it quote-unquote move the needle on your advertising revenue?

Christian Luiga, CFO

Thank you. I wanted to highlight our ongoing journey. Our advertising business has primarily depended on direct sales and top funnel brand spending. Over the years, we've realized that the type of ad business we've developed is susceptible to macro trends. To address this, we have diversified and transformed our platform by creating the Spotify ad exchange and collaborating with the Trade Desk as a pilot project. We anticipate that 2025 will be a year for testing and experimentation, with effects becoming noticeable by 2026. It’s still early, and entering the auction environment requires us to be methodical and cautious about how we introduce supply into these channels. Nonetheless, we are genuinely excited about the potential this holds for us.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question comes from Richard Greenfield on a Super Premium product offering. While some of the labels have talked publicly about this, there doesn't appear to be a consensus of what the record labels or artists want the product to be. What does Spotify want the offering to be and how involved will the artists need to be to make this work?

Daniel Ek, CEO

Yeah. So overall, just as a reminder, we have talked about this in the past quarters as well. We are excited about this and just to set expectations, we are moving from this one-size-fits-all market that quite often happens in early development where you have fewer SKUs to then as you keep growing into more and more mature marketplaces, you add more SKUs to address more of the market. That is sort of how you should think about the evolution of Spotify and this higher-priced music tier of Spotify is certainly one that I think will have a lot of growth for the music industry and something that consumers will love too. I can't really talk about specifics for it, but again, I can talk about the principle that's driving this. The principles for us is always the same, which is how do we create something that consumers love, but that also delivers value back to creators. And you can go back to vinyl buyers, you can go back to all of these super fans that already exist to look for clues in what some of the things are that they value. Some of those things are proximity to artists. Some of those things are, of course, better sound quality and a bunch of other things. I can't get into specifics, but I think I've left enough breadcrumbs for you guys to get excited by.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question comes from Benjamin Black on 2025 framing. 2023 was the year of efficiency. In 2024, you're proving out the unit economics with the strong gross margin performance. What will the story of 2025 be?

Daniel Ek, CEO

Yeah. I wish I had a much cleaner way of positioning the story, but the story of 2025 is growth with profitability, the mix of both being the story. So it's really proven that it's not just about growth, or just about profitability, but that we can deliver both at the same time. And as I mentioned in my opening remarks, we're very excited about what we are seeing right now and the inflection points that sometimes open up as technology becomes available for us to add value to consumers. And this adding value is the key long-term indicator, I think, for building a very strong business. And so we see a lot of those opportunities in 2025, and obviously, we will remain a profitable company as we're pursuing those investments.

Bryan Goldberg, Head of Investor Relations

All right. Another question from Rich Greenfield on advertising. Advertising revenue is growing slower than MAUs and has shrunk from over 14% of revenues to now under 12%. We understand the softness in brand advertising, but there seems to be a growing disconnect between the engagement of your audience and ad dollars. Is your programmatic push the fix alone for advertising?

Christian Luiga, CFO

Thank you. Let me go back and just remind us again here that I just want to say that we actively build out to become a more automated business to better accommodate the external demand. We do rebrand our self-serve platform, Spotify Ads Manager, and we're also piloting our first supply-side platform, Spotify Ads Exchange. I think programmatic is a big part of the solution, that's for sure, but there are also other things into the mix, driving more measurement, diversifying ad formats, et cetera, that will help us. And on programmatic, we should view that as a trivial single fix. With programmatic comes auction and auction is a new thing for us and that will be a big support in this journey.

Bryan Goldberg, Head of Investor Relations

All right. Another question from Doug Anmuth for Christian. Christian, since joining several weeks ago, where have you been most focused? How should we think about your operating philosophy? And has anything surprised you thus far about the company?

Christian Luiga, CFO

I'm getting a bit older, so I don't get surprised as often, but it is impressive to see the company's journey and accomplishments. Being hands-on and witnessing it personally is a warm experience. To answer what I've done in my first two months, I spent the first five weeks learning and understanding the business by meeting with colleagues and external partners to figure out what drives the business, how we're structured, and how everything operates. I've also dedicated significant time ensuring I understand the financial details presented to the market today. Moving forward, I'll be discussing the next steps with management. I want to express my excitement about this role. As for my approach, I prefer to let others describe my style, but I tend to be quite hands-on. I like to work closely with the details before making broader decisions.

Bryan Goldberg, Head of Investor Relations

Okay. Another question from Jessica Reif Ehrlich on audiobooks. Can you provide an update on audiobooks usage and engagement?

Daniel Ek, CEO

Thank you, Jessica. We're very excited about audiobooks and it's fascinating to see how much has happened in the past year. When we launched about a year ago, we thought we had a solid library of titles, but we've now more than doubled the number of titles available, which is fantastic. We are witnessing strong adoption across the board, and the usage per user is also increasing significantly. For example, in the US, audiobook users are consuming more than five additional hours per Spotify user. Considering that Spotify is already a widely used service, the fact that we're seeing an average increase of five hours in consumption is a strong testament to how appealing this offering is for consumers. We're very excited.

Bryan Goldberg, Head of Investor Relations

Okay. Another question from Rich Greenfield on sports. We've seen Amazon and Netflix push into sports to build their respective advertising businesses. Does Spotify need sports audio content to accelerate advertiser demand and interest?

Daniel Ek, CEO

I'll take this one. I think overall, we know what we need to do in advertising. And the primary story in advertising is about meeting the marketers where they want to be met, and that is in the programmatic marketplace and enabling them to more easily buy across Spotify, the network. So I think that's the bigger story. Now when it comes to sports in particular, the truth is we're already playing a pretty big role. So just look at something like The Ringer. The Ringer is doing phenomenal for us on the podcasting side and I know many of you are listeners already to Bill Simmons and all of his podcasts. And so we see that as a great driver for us with advertisers and with consumers as well. So we're very excited about that.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question is coming from Deepak on AI. Given all the innovation on the product front with AI, video, etc., over the last six months, can you give us some color on how these enhancements are benefiting metrics such as engagement and retention?

Daniel Ek, CEO

Yeah, overall Spotify keeps bringing up engagement and keeps bringing down churn. That is the story we've been on. And whenever someone thinks we've reached a ceiling, it turns out that we're finding more ways to drive up the engagement and driving down the churn. And I think this again showcases that we keep adding more and more value to the platform across the board and AI is one of those ways, video is obviously another one, podcasting is the third, audiobooks is the fourth, and what we're doing with courses in the UK being a fifth. There are so many ways that we are both adding lots of new ways that people can engage with Spotify but also small incremental improvements that are driving great results. But we are very excited about driving our usage of Spotify up over the next coming years. I mentioned that when we spoke about AI too, but I really feel like this is a huge unlocking technology that can enable really transformational new ways where people want to soundtrack their lives in even more ways than they've done in the past.

Bryan Goldberg, Head of Investor Relations

Okay. Another question from Benjamin Black, this time on MAU. You changed your marketing strategy and now we're seeing MAU net additions revert towards prior levels. Could you dig in a little bit more into what you did? How sustainable is this level of MAU growth? And should we expect a reversion back to the EUR70 million to EUR80 million per year net-adds you've pointed to in the past?

Daniel Ek, CEO

I think it's early days, but I do believe we turn a corner and are back to growth again on the MAU side. And I'm happy about that because I wasn't happy about us missing the prior forecast. So it feels like we've got a good grip of it now. Now, as it relates to what do we do to make that happen, the reality is it's a bunch of different things, but the chief among them is really product improvements. So, lots of small tweaks that have been driving good results. Things in the past that probably weren't smart, we've reversed. We've added new things as well. All that has created the backdrop of stronger engagement, which then translates to more MAU. Then as you mentioned, on the marketing side, we have improved there too. So we have spent a little bit more on marketing. Now it's important to add why didn't we do that prior. Well, we didn't do that because we weren't seeing efficiency. So as we're seeing more efficiency, i.e., the SAC to LTV ratio that Christian spoke about, then we are happy to spend. Why wouldn't we be? So the team has been working on a bunch of those things. And if we see great opportunities with great SAC to LTV ratios, we will pursue them. If nothing else, the core will be about improving engagement on the product, improving efficiency on marketing.

Bryan Goldberg, Head of Investor Relations

Okay. Next question is from Rich Greenfield on video podcasting. Daniel, if you put your creator hat on, will Spotify offer an ever larger platform for video podcasting? It's still dwarfed by the scale, reach, and engagement of YouTube. We presume that's why creators like Joe Rogan want to be on YouTube and not just Spotify. How do you change that over time?

Daniel Ek, CEO

If you look at the company’s history, we have consistently faced competition from much larger companies and platforms. This has been a significant part of Spotify’s journey. When entering new areas, we don’t overly focus on our competitors. Instead, our priority is understanding the needs of consumers and creators. We have a video event happening tomorrow, which I encourage everyone to check out as I believe it will highlight our approach to addressing genuine needs for both creators and listeners. It’s a common misconception that there’s only room for one dominant player in this space. In reality, creators desire to be present on multiple platforms. This has been evident in our podcasting experience, and we are dedicated to fostering this. Currently, many creators are active on Spotify but only share partial content; they want to find more avenues to add their content. There are also new creators whose needs we have not yet met, but we hope tomorrow’s event will be a significant step toward addressing those needs.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question is from Steven Cahall on the ad-supported tier. Would you consider a modest subscription fee on ad-supported users in mature markets? This appears to be attractive to the labels and it may support your commentary about scaling profitably in ad-supported, especially in a soft CPM environment.

Daniel Ek, CEO

I can't really comment on specifics about pre-announcing what we may or may not do, but I can talk about the sort of general views. We're always open to considering how we evolve our opportunity. And as I mentioned before, we're always thinking about what creators need and what consumers want, and we're really trying to find win-wins between the two. One of the challenges and specifically why music is not analogous to video, however, that's good for investors to be aware of in music specifically, because of the regulatory rights environment, you are with radio and other things, there's a lot of ad-supported music available out there in the marketplace. This is not something that's likely going to change. And so as you think about that, there is a very, very different industry dynamic in music as compared to, say, something like video, where we've obviously followed what's happening with the ad-supported tiers with fees involved, etc. So we're always open. We are always discussing with our partners and with consumer needs, thinking about how do we create the best possible proposition. But it is a very different environment than in video. So I don't think we can just overlay what happened in video and say, hey, let's do the same thing in music because it's a very, very different regulatory environment and very different industry environment.

Bryan Goldberg, Head of Investor Relations

Okay. We've got another question from Jessica Reif Ehrlich on revenue drivers. At your 2022 Investor Day, you provided a revenue goal of 20% annual growth. Are you comfortable that you can achieve this? And can you help us think through the various levers to reach this target?

Daniel Ek, CEO

Yeah. So we have very high goals in this company and we will continue to set very high goals across the board and we're always going to push for more innovation and constantly push for what's next. And we want to be one of these very few iconic companies that defy expectations and that's certainly what I'm focused on every day of my task here. Now, what are the drivers to get to 20% annual growth? Well, it's probably a combination of both super strong top line user growth and then on top of that, very strong monetization. And so in both of these buckets, when you really think about it, we're just scratching the surface of all the potential we have in reaching more consumers across the world. So as you think about the addressable universe, there's definitely more than 3 billion people around the world that care about music. We're only at 640 million so far. So there's plenty of growth left to be had. Now, obviously, if you stretch out 20% across the decades, it will be very tough because we've run out of people. So eventually that growth, depending on what sort of time period you're looking at, will be hard to accomplish. On the revenue side, however, you saw us this year close some of that gap between the value-to-price ratio. We're now back to adding more value there and we will eventually close the price gap on that too. I feel very good about our ability to monetize, and we have to put things in perspective too. A few years back, it was a big question around whether Spotify could even increase prices at all. I think we've proven now that we have that ability to do so. We have the ability to lead on price and we have the ability to do so profitably. There's nothing that makes me stop and think that we cannot do this going forward, but we certainly to get to 20% growth need both advertising to grow faster than what is going now and our subscription business had to have more SKUs to help with that sort of growth. So those are sort of the main ingredients as you think about this.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question is going to come from Kannan Venkateshwar on distribution opportunities. With record labels looking to launch superfan apps, could you talk about Spotify's potential role as a distributor of other applications?

Daniel Ek, CEO

Well, we really don't have anything to announce at this moment. But again, the goal of the company, as I've said now a few times, is to look at the intersection of consumer needs and creator needs. And we're always open to discussing with the industry how we can improve our proposition. And if there are superfan apps that we think have great consumer appeal, we would be more than happy to look at ways to contribute to that growth.

Bryan Goldberg, Head of Investor Relations

Alright. Our next question is going to come from Doug Anmuth again on advertising. FX-neutral ad revenue growth of 7% is well below digital ad peers. Can you talk about the product roadmap here in diversifying the advertiser base away from brand while leveraging demand-side platforms and other ad-tech partners to accelerate growth?

Christian Luiga, CFO

I was going back a little bit to what I talked about before. So actually, the purpose with the changes we are doing and with this Spotify ads exchange is to actually move into more performance-based ad services instead of brand, and that will then take us there. So that's the short answer, and I'll keep it at that.

Bryan Goldberg, Head of Investor Relations

All right. We've got a question now from Maria Ripps on Marketplace. Is there any quantitative color you can provide around Marketplace growth so far this year? Are there any new products or features that you've recently introduced or are working on that you think could be notable growth contributors in 2025 and beyond?

Daniel Ek, CEO

I'm very pleased with the progress we're seeing with Marketplace. More artist and label teams are utilizing it, which is contributing to our growth. We're focusing on providing marketing teams with greater control over how their campaigns are presented and when they go live, allowing for better integration with the tools they already use. In the near term, these improvements are key drivers of growth. Looking ahead, we believe there's still much to be done in merchandising, specifically regarding how music releases and Marketplace products are presented to users. For example, adding music videos to products has led to a noticeable increase in stream share. We're committed to giving label and artist teams more tools and control over their use of Marketplace.

Bryan Goldberg, Head of Investor Relations

Okay, we've got another question from Jessica Reif Ehrlich on music royalties. There's been speculation that the record labels would like to move to a per-subscriber pricing model similar to cable TV networks. From a Spotify perspective, what are the pros and cons from moving from variable to fixed pricing?

Daniel Ek, CEO

Yeah, I'm not sure I can comment so much on that speculation. But to say that we have a very healthy relationship with our partners, and we're constantly discussing what the future of the model will be and how this can provide growth for the music ecosystem.

Bryan Goldberg, Head of Investor Relations

Okay, we've got a question now from Mark Mahaney on new features. How impactful have music videos and AI DJ features and products been to user engagement and satisfaction?

Daniel Ek, CEO

One of the more interesting observations is that when considering Spotify's substantial user base of over 640 million, very few elements influence the overall numbers significantly, while there are more factors that affect smaller user groups. However, AI DJ and music videos have proven to be exceptions, significantly impacting engagement metrics. Users who engage with music videos exhibit much higher engagement and retention than those who do not, similar to the positive effects we are seeing from AI DJ. The results from AI DJ are impressive, not only in quantitative terms but also in how users perceive and express their appreciation for Spotify. Both music videos and AI DJ are performing exceptionally well, highlighting the strength of Spotify. We excel when we can deliver innovative experiences to our users.

Bryan Goldberg, Head of Investor Relations

All right. We've got time for a couple more questions. The next question is going to be from Michael Morris on AI objectives. Can you help frame any incremental investments for your longer-term AI growth objectives? You mentioned you'll be disciplined, but should we expect an additional period of net investment while you pursue new opportunities?

Daniel Ek, CEO

I think one of the challenges for the entire technology industry right now is predicting the investment pattern due to the significant changes in the underlying technology stack. To reassure investors, I want to emphasize that our spending is not reckless and we aren't returning to 2021 levels; instead, we will maintain a high level of discipline in our approach. Unlike other AI companies, our model does not require heavy capital expenditures; it is purely based on usage, which is linked to higher engagement and retention, ultimately creating value. This is the mindset we should adopt, and while we will remain disciplined, if we identify opportunities that could significantly enhance engagement or retention, it's in Spotify's best interest to pursue them. Even if it means making short-term trade-offs that might affect margins, we are willing to make those decisions. However, we will continue to be very disciplined in how we approach this.

Bryan Goldberg, Head of Investor Relations

Okay. We've got another question from Kannan Venkateshwar on podcasting subscriptions. If podcasters like the New York Times use a paywall on Spotify to improve their yield, is there an opportunity for Spotify to share in that upside?

Daniel Ek, CEO

There are certainly limitations regarding how app stores function and our capacity to implement upsells overall. This is a topic that I feel personally passionate about, as we recognize the demand from creators to offer more customizable options, and we would be eager to support that. However, there are some limitations due to the constraints established by app stores. Ideally, we see our partners interested in providing additional products through Spotify, and they would appreciate our involvement in that process. The main issue is more about the technical aspects and whether the app store framework allows for it. In theory, we could make it happen, and I believe our partners would like us to assist in growing their businesses, which we would also be excited to do. However, in the short term, we face challenges with the app store restrictions that affect our ability to proceed.

Bryan Goldberg, Head of Investor Relations

Okay. All right. And our final question today is going to come from Barton Crockett on the competitive landscape. How do you believe Spotify's growth currently compares to major rivals such as Apple Music?

Daniel Ek, CEO

We are very pleased with our growth rates in comparison to our competitors in the music industry, and I think that’s all I’ll say on the matter. We are genuinely confident about it.

Bryan Goldberg, Head of Investor Relations

Okay. Well, that concludes our question-and-answer session. And I'll turn the floor back over to Daniel for some closing remarks.

Daniel Ek, CEO

Alright. Thanks, Bryan. So I think from all my remarks today and my commentary, if we want to conclude, I would just say we've never been in a stronger position, thanks to what's really been an outstanding execution by the Spotify team. And I'm incredibly proud of the way we've delivered and the progress we've made. We are where we set out to be, if not a little bit further and on a steady path towards achieving our long-term goals. And the key here is really the relentless pursuit of innovation and commitment to growth that I think sets us up to deliver the most valuable user experience in the industry while reinforcing the core strengths that make Spotify unique. And I am incredibly excited about what lies ahead for us. And obviously, I hope you guys will join us and check out the news on our video event tomorrow too. So, thanks for joining us.

Bryan Goldberg, Head of Investor Relations

Okay. That concludes today's call. A replay will be available on our Investor Relations website and also on the Spotify app under Spotify Earnings Call Replays. Thanks again, everyone.