Earnings Call Transcript
Spotify Technology S.A. (SPOT)
Earnings Call Transcript - SPOT Q3 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by. And welcome to the Spotify Q3 2020 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. I would now like to hand the call over to your speaker today, Bryan Goldberg, Head of Investor Relations. Thank you. Please go ahead.
Bryan Goldberg, Head of Investor Relations
Great. Thank you, and welcome to Spotify’s third quarter 2020 earnings conference call. I hope everyone is continuing to stay safe. Our team is again hosting this call remotely. Our CEO, Daniel Ek, is participating from Stockholm, Paul Vogel, our CFO is at his home office in New Jersey and I’m joining from New York. We’ll start with opening comments from Daniel. After the remarks, Daniel and Paul will be happy to answer your questions. We’ll again be taking questions exclusively through slide. Questions can be submitted by going through slido.com S-L-I-D-O.com and using the code #SpotifyEarningsQ320. Analysts can ask questions directly into slido and all participants can then vote on the questions they find the most relevant. If you have some reason you don’t have access to slido, you can e-mail investor relations at ir@spotify.com and we’ll add your question. Before we begin, let me quickly cover the Safe Harbor. During the call, we will 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 will 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, I will turn it over to Daniel.
Daniel Ek, CEO
All right. Hi everyone, and thanks for joining us. So Q3 was a very strong quarter surpassing our own expectations on several measures. I think this is a testament to all the amazing contributions of the Spotify team in these uncertain times, as we remain focused on the needs of our creators, fans and partners around the world. Monthly active users beat the top end of our guidance and subscribers hit the very top end of our range and our service now reaches 320 million users and a 144 million subscribers. The size of our total catalog increased significantly, and our advertising business returned to growth. And we also beat expectations in our newest markets, where we're seeing growth continue to accelerate. I think this affirms our belief that there's a significant pent-up demand for Spotify around the world, even in places where our service has yet to launch. These results illustrate the power of our business despite COVID and other related challenges across the globe. As a result of our performance this quarter, we have updated our Q4 guidance ranges to reflect increased optimism on where we expect to end the year. It's also worth noting that we've paid out more than a billion to right holders in every quarter in 2020. I'm proud to say that we're on track to pay another billion-plus in Q4. In addition to sharing our results, I believe these calls are also timed to help frame where we're headed. Our team remains laser-focused on building the world's largest audio network. While it's still early days, it's clear to us that our strategy is working. We know that when we reach more listeners, we're able to attract more creators to our platform. With more reach comes more content. With more content, especially content unique to Spotify, there come more opportunities to monetize. That interplay is super important because it's really the foundation of our flywheel. That flywheel continues to accelerate faster with every new user and creator that comes on our platform. Bottom line, as I look at the increase, specifically in reach that we're seeing this quarter, it gives me confidence in our ability to monetize that growth. To fuel the flywheel, you'll see us continue to invest in enhancing our user experience, furthering market expansion, and developing and acquiring unique content for both new and established creators. Related to this, you've seen us make a few big moves in launching new content. Our number of new podcasts increased over 20%, and music releases are up 13% over the prior quarter. We saw a strong positive reaction when Michelle Obama and Joe Rogan's podcasts launched during the quarter. We're seeing great success with our original exclusives, which now account for more than 19% of all podcasts on the platform. In addition, we're hard at work on new content development that will roll out in the months ahead. One of the residual benefits of our time indoors is that many creators have turned back to what they do best, which is creating. As a result, future music releases look very strong too. New music is now coming from artists like Billie Eilish, Drake and Sir Paul McCartney, just to name a few. Another benefit of the investment we've made in our content and user experience is that Spotify listeners are enjoying greater value than ever before. We believe this presents two distinct opportunities. One, with about 60% of Spotify subscribers starting out in our free tier and our performance on MAUs in 2020, we are confident that we have a long runway to continue to grow our subscriber base in the months and years ahead. Two, long term engagement and listener value per hour is high, giving us the ability to selectively increase our price. Here's how I think about it. While our primary focus remains on user growth, based on our maturity in certain markets, and the increasing value we provide to our subscribers, including enhanced content, we've seen engagement and more specifically value per hour grow substantially over these past few years. An increase in value per hour is the most reliable signal we have in determining when we're able to use price as a lever to grow our business. Initial results indicate that in the markets where we've tested increasing prices, our users believe that Spotify remains an exceptional value, and they've shown a willingness to pay more for our service. You'll see us further expand price increases, especially in places where we're well positioned against the competition, and our value per hour is high. However, we will continue to tread carefully in these COVID times to ensure that we don't get ahead of the market. To wrap it up, it was a really strong quarter. As history has shown us, while we don't always nail the timing, we're usually right in predicting the outcome of our strategy. I continue to believe in the long term value of each and every listener on Spotify; there are still billions of listeners that we've yet to reach around the world. Listeners who tried Spotify tend to stay, and they often convert to a subscriber. That is why our continued focus is on reaching more listeners, as ultimately, this will translate into long term value for our investors. And with that, I'll turn it back to Bryan.
Bryan Goldberg, Head of Investor Relations
Thanks, Daniel. Again, if you have any questions, please go to slido.com #SpotifyEarningsQ320. Once your question is entered, you can edit or withdraw your question by selecting the option in the bottom right. We'll be reading the questions in the order they come in with respect to helping people vote up their preference for questions. Our first question today comes from Matthew Thornton. When you think about the two-sided marketplace, longer term, do you believe that there's opportunity to monetize and play a role in accelerating the discovery, consumption, growth of live and virtual events, as well as memorabilia and merchandise?
Daniel Ek, CEO
Yes, so long-term if you think about our marketplace strategy, it's essentially about having creators meet fans. There are three distinct components to this: one is to grow their fan bases, the second is to engage further with their fan base, and the third is monetizing those fan bases. We're going to create tools and services in all three of these categories. First, how you grow your fan base, second in how you engage with your fan base, and then thirdly, how you monetize it. Live events are a very exciting component, as well as merchandise. We're still in early days with some of our experiments, but I think the future of the platform holds a lot more of those types of tools.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Michael Morris from Guggenheim. Any indication of how Joe Rogan performed overall since launching on Spotify? Are listeners from other platforms migrating to Spotify in advance of exclusivity?
Daniel Ek, CEO
Yes, so Joe Rogan has performed really well since its move to our platform. It has exceeded expectations. We obviously had expectations of how it would behave, both now and during the exclusivity period. We feel really good about how it's performed. We've had faster growth than we expected, and we're anticipating another step up when the podcast goes exclusive to us before the end of the year.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Richard Kramer of Arete. Can you share some rough percentages of premium subscribers that are actually paying? We understand the number is around 60% with the remaining 40% under family plans.
Daniel Ek, CEO
Yes, we don't break out the mix by products. As we've talked about, ARPU has come down, and most of that has been due to product mix. The family plan has grown as a percentage of the overall user base, and it comprises a decent amount of our users. We're focusing holistically on growing overall users and subscribers, ensuring that we're able to grow them in a way that is a positive LTV to SAC. We feel good about the product mix within our portfolio.
Bryan Goldberg, Head of Investor Relations
Another question from Richard. Spotify has now had 15 straight quarters of declining premium ARPU, even adjusting for FX. With the industry trend towards further bundling and saturation in developed markets, should investors expect any reversal of this trend in 2021?
Paul Vogel, CFO
Yes, dovetailing on my last answer, we've been focused on growing users and subscribers first before worrying about monetization. This quarter, ARPU was down by 10%, down by 6% on an FX neutral basis, which was in line with our expectations. We have raised prices in a few markets, continuing to test where it makes sense for us to potentially increase pricing. It's a balance between growing users and subscribers and pricing opportunities. We've added tremendous value into the ecosystem without raising prices over the last 5 to 10 years, so the value that subscribers are getting has materially increased.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Eric Sheridan of UBS. How should we think about podcast investments beyond 2020? Are you at the necessary scale or further investments needed in areas such as tools for creation and measurement, exclusive content, and local language content outside the U.S.?
Daniel Ek, CEO
Yes. We're aiming to be the number one audio platform globally, a category that is huge. Even while we're cash flow positive, we will continue to invest, believing we are early days in our growth. Our focus has been on growing the user base and the number of subscribers, more so than on raising prices. However, we are adding that to the mix as the overall growth in every market is our priority. This revenue growth can come from either adding more users or raising the prices of existing users. We still believe that there are billions more potential users out there, and investing in better tools will enhance engagement, which in turn increases our ability to monetize.
Bryan Goldberg, Head of Investor Relations
Next question comes from Matthew Thornton. On pricing, you guys raised the family plan price in seven markets. What are you seeing in those markets? For example, penetration, engagement, FX, something else that led you to raise price? Do you expect similar actions in more markets in the fourth quarter and into 2021?
Daniel Ek, CEO
Yes, it’s about looking at each market individually, assessing streaming growth, penetration, and our market share. The family plan has great value, so we thought there might be an opportunity to work in certain markets. So far, we've done this selectively in places like Norway and New Zealand, and initial learnings show no negative impact on retention or churn.
Paul Vogel, CFO
Yes, in addition to Norway which we did a while ago, it had no negative impact on user experience. We’re cautiously optimistic based on early data.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Richard Kramer. Does Spotify get any revenue from hosting podcasts where ads are sold by the content owner/creator?
Paul Vogel, CFO
So the short answer is no. We sell ads for content that we own or exclusively license. We don't take any revenue for content passed through to our platform. However, 19% of our podcast MAUs now engage with their own content, providing us more opportunity to monetize.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Justin Patterson. How do you think about TikTok’s influence on the music industry? What, if any, trade from TikTok can you layer into your business?
Daniel Ek, CEO
TikTok is a great discovery vehicle for music and cultural memes today. Our focus isn't on making every user a creator like many social platforms do, but rather empowering professional creators. We see ourselves as more of an extension of creative expression. For example, we've launched features like Music and Talk allowing podcasters to incorporate music into their shows.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Rich Greenfield. Can you talk about the controversy surrounding the Joe Rogan podcast? How are you handling this with your employees?
Daniel Ek, CEO
We have millions of creators on the platform and almost 70 million pieces of content. It's important that everything we do is based on consistently applying our content policy, which is openly available. We review all content that goes up, regardless of whether it's Joe Rogan or anyone else, to ensure adherence to these policies.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Eric Sheridan. Can you provide more granularity on the recovery and advertising trends? Is it a broader array of advertisers engaged with the platform? Is it a recovery in overall ad budget trajectory versus earlier this year? Can you quantify the exit rate in September that you referenced in the shareholder letter?
Daniel Ek, CEO
The recovery was broad-based. Our direct advertising business improved, programmatic growth was in line with expectations, and we saw significant strength on the ad studio side, with podcasting up year-over-year. We have positive advertising growth in all three months of Q3, and we expect Q4 advertising revenue to grow faster than Q3.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Richard Kramer. How long do you anticipate until the two-sided marketplace effort covers its costs?
Paul Vogel, CFO
We don't break down the profitability or cost of any of our businesses that way. At a high level, we feel good about the two-sided marketplace in general. We've seen promising trends through the first nine months of the year.
Daniel Ek, CEO
The metric we evaluate our investments by is the traction they have in the marketplace. For instance, our sponsored recommendations are up to 76% with 74% customer retention, indicating we're providing a lot of value to the ecosystem.
Bryan Goldberg, Head of Investor Relations
Next question comes from Brian Russo of Credit Suisse. Can you quantify how much of your advertising revenue is related to podcast listening versus music? And how different the growth rate of podcast-related advertising is from your overall advertising revenue growth?
Daniel Ek, CEO
We don't break it out that way; however, podcast revenue was a significant driver of growth this quarter. Overall, podcast growth was strong, with about twice the number of podcast advertisers in Q3 compared to Q2.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Eric Sheridan. You mentioned a stronger-than-expected rush to launch and a successful India marketing campaign. How has your approach to market launches and stimulating user acquisition in emerging markets evolved over the past few years? What might that mean for medium to long-term growth prospects?
Daniel Ek, CEO
Overall, it's an evolving toolbox. For instance, in Western markets, we focus on signups by email, while in emerging markets, it's essential to use phone numbers and engage with existing services like WhatsApp. We're also heavily invested in understanding cultural aspects to drive successful market launches. The pent-up demand we've seen in markets where we haven't launched, like Russia, is particularly encouraging.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Josh Le of Covenant Capital. Your churn rate has been declining, due in part to lower ARPU. How do you think of the balance between ARPU and churn? At what churn rate would you raise prices?
Paul Vogel, CFO
Churn is tied to how we grow the overall revenue long-term. Products with high retention rates help lower churn over time. The product has gotten better, and as we scale, we have more long-term users, which naturally supports churn reduction.
Daniel Ek, CEO
I think the mental model for viewing this is as a ladder. Users often start in environments where monetization is low, so we engage them with our free tier. Ultimately, higher retention leads to upgrades in premium memberships, and we continuously evaluate our ability to raise prices based on the value users derive.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Josh Le on pricing. What could be the impacts of Apple's bundle to Spotify pricing?
Daniel Ek, CEO
We haven't noticed any impacts so far, evidenced by our recent quarter. If there is an impact, it could reinforce the Apple ecosystem. However, many of our users don't stick to just one ecosystem. They're exploring across platforms, which is where our competitive edge lies, as Spotify plays nicely across all hardware.
Bryan Goldberg, Head of Investor Relations
The next question comes from Richard Greenfield. Advertising is still less than 10% of your revenue, despite rapid scaling. What do you anticipate long-term revenue mix looks like?
Paul Vogel, CFO
We're very optimistic about advertising. It could potentially be 10% or even 20% in the future. With our growth in free music and podcasts, there's a lot of opportunity for advertising. We're innovating in this area, particularly on podcasting, to help creators monetize more effectively.
Daniel Ek, CEO
Our goal is to be the number one audio platform globally. Audio as a category is massive. We believe the ad model will consist of subscription, advertising, and a-la-carte offerings. As we scale our user base, we expect monetization to catch up.
Bryan Goldberg, Head of Investor Relations
Next question comes from Ben Swinburn of Morgan Stanley. What drove the decision to raise prices in the markets you called out in the shareholder letter? Why those seven? Why family plan? What signals are you looking for in other markets to raise prices?
Daniel Ek, CEO
It goes back to assessing each market individually, understanding streaming growth, penetration, and market share. The locations we raised prices reflect a wealth of diverse experiences. We want to test how these changes might work in different environments. We raised the family plan price because we believe in its value.
Bryan Goldberg, Head of Investor Relations
Our next question comes from John Egbert at Stifel. You're about two months into the non-exclusive edition of Joe Rogan on the platform. How has the podcast performed relative to expectations so far? Are you reaching a large number of listeners also consuming music for the first time? Are people listening outside the U.S.?
Daniel Ek, CEO
Overall, it has been a great success. The real test will come when the podcast becomes exclusive to our platform, but we are very encouraged by the current performance. Notably, it's performing well internationally, which showcases the platform's appeal.
Paul Vogel, CFO
I’ll add that the podcast is the number one podcast in several markets, even non-English speaking ones, indicating its strong global reach.
Bryan Goldberg, Head of Investor Relations
Can you discuss the factors that led the Michelle Obama podcast to be made available on platforms other than Spotify?
Daniel Ek, CEO
It's important to note that deals we make often occur well before content launches. While we made a decision to window the Michelle Obama podcast temporarily on our platform, we aim to secure more exclusive arrangements moving forward.
Bryan Goldberg, Head of Investor Relations
Another question from John Egbert at Stifel. Can you discuss the adoption and P&L impact of the two-sided marketplace tools relative to your expectations? Are you on track to meet or exceed the 50% growth target for gross profit from the two-sided marketplace?
Paul Vogel, CFO
We are still on track to meet expectations for the full year regarding marketplace contribution to gross profits. Nothing has changed in our outlook.
Daniel Ek, CEO
The UMG partnership bodes well for the marketplace strategy. We’re ramping up that partnership and seeing strong engagement metrics, indicating users find value, and we're committed to further developing this area.
Bryan Goldberg, Head of Investor Relations
Our final question comes from Steven Kahl at Wells Fargo. We've seen a number of advertising companies speak about Q4 being sequentially worse for ad growth due to rising coronavirus cases. What’s baked into your Q4 guidance in terms of ad revenue or ARPU?
Daniel Ek, CEO
As stated earlier, we don't provide specific guidance on premium versus ads, but we do expect year-over-year growth for advertising in Q4 to outpace that of Q3. There is uncertainty surrounding COVID's impact, which we've factored into our predictions.
Paul Vogel, CFO
While advertising is a small part of our revenue currently, it remains a focus area for growth.
Bryan Goldberg, Head of Investor Relations
Our next question comes from Justin Patterson. Podcasts have been a significant investment over the past two years. Can you discuss what you've learned during this time, and how audience reach translates into listening hours and subscriber conversion?
Daniel Ek, CEO
We've learned a great deal about integrating podcasting with our music strategy. The core thesis is that adding podcasting can enhance user engagement and retention. We're still developing how we merchandise and recommend podcast content, and the goal is to expand features that allow creators to engage with fans more effectively.
Bryan Goldberg, Head of Investor Relations
We're out of time for the Q&A session. I'd like to turn the call back to Daniel for some closing remarks.
Daniel Ek, CEO
Thanks, Bryan. I'm really proud of our team and how well our business has performed over the first nine months of the year. This is a testament to our flywheel. As we gain momentum, I believe you'll see greater acquisition, retention, engagement, and monetization, which is beneficial for Spotify, our users, and creators. It's also advantageous for the entire audio ecosystem, and for that reason, I remain optimistic. For more on this quarter, I encourage you to listen to the Spotify for the Record podcast, which will go live on our platform tomorrow morning. Thanks again for joining us, and have a great day.
Bryan Goldberg, Head of Investor Relations
Thanks again everyone for joining. The replay call will be available on our website and also on the Spotify app under Spotify earnings call replays. Thanks again.
Operator, Operator
This concludes today's conference call. You may now disconnect.