Earnings Call Transcript - SPOT Q1 2026

Operator, Operator

At this time, I would like to turn the conference over to Bryan Goldberg, Head of Investor Relations. Please go ahead.

Bryan Goldberg, Head of Investor Relations

Thanks, operator, and welcome to Spotify's First Quarter 2026 Earnings Conference Call. Joining us today will be our co-CEOs, Alex Norström and Gustav Söderström; and our CFO, Christian Luiga. We'll start with opening comments from the team and, afterwards, we'll be happy to answer your questions. We will be taking questions today via Slido. Questions can be submitted by going to slido.com, and using the code #SpotifyEarningsQ126. 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 differ materially 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 Alex.

Alex Norström, Co-CEO

Thank you, Bryan. Hey, everyone, and thank you for joining us. 2026 is off to a strong start, with performance reflecting solid execution, healthy growth and the kind of engagement trends that give Gustav, myself and the team confidence in building Spotify for the future. In Q1, we saw results that were in line or better across the board. We surpassed 760 million MAU, delivered on the subscriber growth we aimed to achieve, and we saw healthy engagement from existing users, reactivations and new users alike. Since the global rollout of our more personalized free experience, users in key markets like the U.S. are now listening and watching more days per month. Now for a business as established as ours, and by the way we're celebrating 20 years this month, this is an exciting development. I'll share more about why in just a moment. We also netted our second highest gross margin ever. All that reinforces this confidence in sustained user and subscriber growth, low churn and then also continued progress on revenue and margin. For over two decades, we have worked hard to forge strong relationships with our industry partners and the artists and creators that we support. You've watched these relationships evolve in the last 20 years, and we have never been in a better position to innovate and to grow, thanks to the progress we're making together. So the trust that we have built is rooted in our collective desire to deliver results and expand the overall opportunity. We will have some new things to share on that front soon. We just released our annual report on the health and growth of the industry. Loud and clear, they show that in 2025, we paid out a record $11 billion plus to rights holders while continuing to outpace the growth of others. And year-over-year, we expect that outperformance to continue. On top of the streaming success, there's no doubt that artists, songwriters, musicians and fans are always seeking stronger connections. Song DNA and About the Song were introduced this quarter to pull back the curtain on the remarkable talent behind our favorite tracks and offer more insights into a song. But we didn't stop there. Live experiences are one of the most impactful ways for artists and fans to connect. This winter, we took Spotify's most streamed global artist, Bad Bunny, to Tokyo to perform in Asia for the first time in front of some of his biggest super fans. And then we turned around and broadcast that iconic moment to the world. This went beyond the concept. It was a real opportunity to amplify culture. All of this drives retention. So let me take a minute to explain how we think about retention. Importantly, it acts as a proxy for how users value their time on Spotify. We look at many metrics, but the three that drive retention are more days in a month, more devices, and more content types or verticals. I've already told you we've been growing today's users' spend with us each month. Engagement really is the lifeblood of Spotify. I've been very excited to see this expand over the years. Engaging with us on more devices and also across our three content types compounds this. This is how we grow the lifetime value of users. Users who engage in this way stay longer or perhaps never leave. These three levers are rooted in our personalization efforts and act to reinforce one another. And AI just takes this to a whole new level. Essentially, we are unlocking your Spotify, your way for 0.75 billion users around the world. Yesterday's announcement around fitness is a natural extension of this strategy. Spotify is already a trusted resource for wellness and fitness. Nearly 70% of premium users work out monthly and our users have created more than 150 million workout and training playlists, with many also turning to prompted playlists for support. So to meet this need more directly, we are launching a fitness hub on Spotify. As we just announced, this hub features Peloton's premium subscriber content in an ad-free experience. Of course, this content will be a very strong complement to what has already been working, including content like Yoga with Cassandra, Jordan Jo and Chloe Ting. I know we continue to talk about our ads business as a work in progress, but the key point is that after 1.5 years of rebuilding, the foundation is now in place. Brands have always valued Spotify for its high user engagement, its beloved brand and its high-quality content. But the market shifted with advertisers now favoring biddable buying. We had to evolve to capture that TAM. So we've rebuilt our stack end to end. Now while this creates some short-term pressure, it unlocks a much larger opportunity. And we are making solid progress. Today, biddable represents more than one-third of ad revenue, and it's growing quickly. So with biddable expanding and also our active advertisers growing, coupled with improvements in our measurement and performance, we can now innovate in ways the old stack never allowed. This finally lets us better capture the value of our audience. This is exactly how we wanted to start the year of raising ambition. We're now growing at scale, generating significant cash and reinvesting to capture the opportunities that matter the most. What you're now seeing is the beginning of a much larger next chapter, and we're excited to go deeper on that at our upcoming Investor Day with you all. With that, I'll hand over to Gustav.

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

Thanks, Alex. Now I'll pick up a little bit on what comes next, because that's where much of our focus is right now. If you zoom out, the way we think about Spotify is pretty straightforward. With AI expanding our opportunities, we're building a system that understands our deeply engaged, passionate 0.75 billion users, one that adapts to them and improves the more they use it. It's also increasingly a platform that puts control directly in users' hands, with their ideas, logic and creativity — a platform that's deeply personal, increasingly interactive and evolving from a solo experience into something inherently multiplayer. As I shared last quarter, and more recently at South by Southwest, AI isn't new for us. Machine learning and personalization have long been core to Spotify, from discovery to recommendations. What's changing is what the technology is now allowing us to better understand, develop and deliver: creating differentiation and unlocking a very different experience and a new level of personalization. From our earliest days, Spotify has been a technology company, and we've always seen ourselves as the R&D department for the music industry. That mindset has helped us embrace new technologies to accelerate product development and create unique value. Combined with our ads-plus-subscription model, deep expertise in personalization and scale operations, we think this positions us very strongly for the AI era. We're integrating AI across every part of Spotify, accelerating how we build and deliver at a pace we haven't seen before. We're shipping more, faster and with greater efficiency, lowering the cost per feature while increasing the impact. You can see some of the inference costs behind that acceleration in our OpEx. But we have tremendous confidence in what we're building, and I will share more about that soon. DJ is now used by 94 million subscribers, closing in on 100 million, driving billions of hours of engagement. In this quarter, we've continued to push the boundaries of the user experience with new AI-powered features. As always, early adoption and deep usage is coming from our power users. But what's changed is how quickly we can learn from that behavior, refine the experience and scale it to a broader audience, delivering improvements faster and at a fraction of the historical cost. And all of this benefits LTV. We're particularly excited about Taste Profile now in beta. It gives users a clear view of how Spotify models what they are listening to across music, podcasts and audiobooks, and puts them in the driver's seat, allowing them to directly edit and refine their profile. So imagine telling Spotify to include more songs by those two artists my kids are obsessed with, or maybe the opposite — actually exclude those two artists, or add a classical tab to my home page. This level of nuanced control empowers users like never before. We've also significantly expanded prompted playlists, enabling users to act as their own algorithmic curators. You can write prompts to generate playlist-specific moods, activities or cultural trends across music, but now also podcasts. Together, these features point to something bigger, a transition from a world where Spotify recommends things to you, to a world where you can actively shape, guide and interact with our platform — from passive to interactive, from static to adaptive, and from single-player to multiplayer. And we think that's really important, not just for Spotify, but for how people experience media. We're already seeing this more interactive, multiplayer Spotify take off with features like Jam, where usage has doubled year-over-year and now exceeds 100 million monthly listening hours. There is also Blend, Messaging, Mixing and, of course, Wrapped Party. So we're just getting started here. We're well positioned because of our large engaged user base, our deep creator relationships and years of investment in personalization and infrastructure scale to arrive at this agentic moment. Together, these create a platform that can take advantage of this moment and unlock entirely new growth vectors that will enable us to climb to new mountains previously unimaginable. This connects to the broad opportunity ahead. We see significant room to grow across users, formats and engagement, and to really expand what Spotify is and can become over time. We're at a pivotal moment building towards something even bigger. And on May 21, we'll show you why we're so excited about what comes next. We hope you'll join us there at our Investor Day. Now I'll turn it over to Christian to take you through the numbers.

Christian Luiga, CFO

Thank you, Gustav, and thanks, everyone, for joining us today. Let me cover the quarter 1 results and then I will provide some perspective on our outlook. Unless otherwise noted, all referenced growth metrics are presented on a year-on-year constant currency basis. Additionally, this quarter, we have implemented a minor reclassification of non-advertising activities from our Ad-Supported segment to Premium. This is to better reflect the performance of our core advertising business. Just for reference, in quarter 1 last year, we shifted EUR 12 million in revenue and EUR 7 million in gross profit from our Ad-Supported segment to Premium. Any comments on the segment growth rates are on a like-for-like basis. Overall, we were very pleased with how the business performed in the quarter. MAU grew by 10 million to 761 million in total, surpassing our guidance by 2 million. Our growth rate accelerated 12% year-on-year, up from 11% in quarter 4. Outperformance was led by rest of the world and North America where we continued to benefit from our enhanced free tier rollout. We added 3 million net subscribers during the quarter, finishing at 293 million, in line with our guidance. We saw no surprises with respect to price-increase related churn following our January U.S. price increase. Total revenue was EUR 4.5 billion, growing 14% year-on-year, which was an acceleration from 13% we delivered in quarter 4. Premium revenue rose approximately 15% year-on-year versus 14% last quarter. This was driven by subscriber growth and ARPU expansion of 5.7% year-on-year. Our Ad-Supported revenue grew approximately 3% year-on-year. Our new automated sales channel continued to grow fast and now represents over 30% of our Ad-Supported revenue in quarter 1. We also saw some continued choppiness in our legacy direct sales channel. While this dynamic will likely continue in the near term, we still expect improved growth in the second half of 2026 as our billable channels continue to scale. Gross margin came in at 33%, surpassing guidance by approximately 20 basis points, with a year-on-year expansion of approximately 133 basis points. Favorability versus guidance was driven by better other cost of revenue and revenue mix. The operating income of EUR 715 million was EUR 55 million above our guidance of EUR 660 million, delivering an operating margin of 15.8%. Our outperformance was driven primarily by social charges, which had a positive impact of approximately EUR 49 million relative to our forecast due to share price movements in the quarter. Excluding the non-forecasted associated charge favorability, we came in approximately EUR 6 million above guidance, driven by the gross margin outperformance. Finally, free cash flow was EUR 824 million in the quarter. Performance here was a bit stronger than our typical quarter 1 due to some timing factors, which will likely reverse in quarter 2. On capital allocation, we repurchased $361 million in shares during quarter 1, continuing our focus on opportunistically offsetting dilution from employee equity programs. We also settled our $1.5 billion exchangeable note that was due in March, with cash on hand, rather than issuing new shares. As of the close of the quarter, we had EUR 8.8 billion in cash and cash equivalents and no debt other than lease liabilities. Looking ahead into quarter 2, we see continued momentum and a healthy global funnel and are forecasting MAU of 778 million, an increase of 17 million from quarter 1. On subscribers, we are forecasting 299 million for quarter 2 or a net addition of 6 million. This is modestly below the significant outperformance we saw in the prior year quarter, which benefited from items such as a favorable adjustment to our iOS app in the U.S. We reiterate our previous statement that we expect another full year of healthy subscriber growth, weighted more towards the back half of the year. We are also forecasting total revenue of approximately EUR 4.8 billion in quarter 2 or 15% growth. This reflects the ARPU increase of 7% to 7.5% year-on-year as we see additional benefit from the recently announced pricing action, partially offset by the lapping of pricing actions last year in the Benelux region. We anticipate the quarter 2 gross margin of 33.1%, approximately 160 basis points above the prior year. Our gross margin outlook incorporates continued strengthening in our core business alongside the reinvestments into new products and initiatives that we believe set us up well for future monetization potential. Moving to operating income, we are guiding to EUR 630 million in quarter 2. This reflects the above along with the timing of marketing for our latest features. This also reflects R&D related to strategic AI initiatives that are already driving engagement. We expect operating expenses to remain at these levels for the next quarter or two, and we are confident that it will enable healthy LTV returns. Although we do not provide full year guidance for gross margin and operating margin, we continue to expect both to improve in 2026 on a full year basis, with quarterly progression being variable and dependent on the timing of our investments. We also continue to expect meaningful year-on-year growth in free cash flow in 2026, reflecting our improved profitability and working capital profile, while we're also progressing towards a normalized tax rate in 2027. In conclusion, quarter 1 was a strong start to 2026. Revenue growth accelerated and profitability improved as we continue to reinvest in our future growth potential. We remain really well positioned to continue compounding growth and profitability. With that, I hand it back to you, Bryan.

Bryan Goldberg, Head of Investor Relations

Great. Thanks, Christian. And again, if you've got any questions, please go to slido.com, #SpotifyEarningsQ126. Our first question today is going to come from Ben Black — oops, I apologize, Ben, I just accidentally resolved it. We'll get that question back in the queue. One sec. We're going to go to Rich Greenfield. I apologize. Slight technical issue here. We're going to start with Jessica Reif Ehrlich's question on operating expenses. Q1 had higher marketing, cloud and AI spend. Can you discuss the pace of investment for the balance of the year and how you would define a successful outcome for this investment spend?

Jessica Reif Ehrlich, Analyst

Q1 had higher marketing, cloud and AI spend. Can you discuss the pace of investment for the balance of the year and how you would define a successful outcome for this investment spend?

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

Jessica, this is Gustav. Thanks for sneaking an AI question right at the top there. They usually take longer to get to. So I'm going to take the opportunity. We did spend a little bit more on OpEx. The way to think about it is we have not increased our headcount; in fact, we slightly decreased our headcount, but we are spending more compute per employee. That is because we're seeing tremendous return in terms of productivity. We talked about accelerating our ability to ship products already during the late fall; that has only accelerated since then. So we're simply doing much more, and we're getting a very good return on that investment. But as we ship more features, in order to get the true return on that investment, we also need to tell our users about those features, which is why we're seeing some more sales and marketing spend as we market these features to users. The way to think about it is we see tremendous opportunity here. I usually make the analogy to 2009 when the iPhone came out and the App Store appeared — and believe it or not, I was actually here back in 2009, so I lived through that. It was a time of tremendous opportunity. Some people sat around and waited. Spotify did not — we took the opportunity. We drastically accelerated first our conversion to Premium and then our free user growth. We think this opportunity is as big or possibly bigger. So we're taking that opportunity. But we are very diligent and very disciplined about those investments. We are seeing these returns. I talked in my prepared remarks about DJ closing in on 100 million users. Also something we released only four weeks ago, Song DNA, is now up to 52 million users in just four weeks. So we are seeing the kind of growth and return on these future investments that we want to see. Usage is a good proxy for retention and retention is a good proxy for revenue long term.

Rich Greenfield, Analyst

On the state of the ads business. Growth is still slowing after the meaningful investments in ad tech in 2025 and absorbing the impact from changes to podcast advertising for Premium subscribers. Why is increased engagement not translating to accelerating ad revenue growth?

Alex Norström, Co-CEO

Rich, my friend. This is Alex. I hope you're doing well. I just wanted, before I expand on the question, to mention to Jessica: you should check out Prompted Playlist; a global campaign just came online yesterday. It's a terrific campaign that explains how basically we give you back more control over your Spotify using AI. Now, let's get back to the ad business. The ad business, Rich, has been seeing very steady progress more recently. But if you take it back 1.5 to 2 years, we observed that there was a gap. What was the gap? Essentially, we were missing out on a TAM where people were putting a lot of money. That time was programmatic; it was automated sales and it was biddable exchanges. The decision we made back then was a pretty tough one because we had to essentially rebuild the entire stack. We did that knowing that we would face some short-term pressure, but that it would unlock a meaningfully larger market for us in the long term. Now that transition is done. So now it's about execution. It's about patience. What you have to believe for this to work out are a couple of things. Mainly, when we have seen increased time spent on Spotify, and quality time to boot, then any gap to monetization typically closes. It's a question of time. The other things you need to believe in are that this rebuilt new stack actually gives us more opportunity to do new things that we couldn't do before, and that our measurement and performance show that Spotify delivers as a brand. What hasn't changed is why advertisers come to Spotify: our beloved brand that they want to associate with, our high user engagement, and our high-quality content.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question is going to come from Benjamin Black on gross margin. First quarter Premium gross margin was very strong despite only one month of U.S. pricing. Can you highlight some of the key drivers of the outperformance? And also dig a bit deeper into the Q2 gross margin guide. Could you talk about the investments you're making that may be weighing on gross margin upside?

Alex Norström, Co-CEO

Benjamin, Alex here. I was looking forward to answering this question. Both Gustav and Christian are very pleased with the gross margin progression, not just for this quarter but consistently in the last two years. The underlying reason for this is a very healthy core that spans music, podcasts and audiobooks. As far as going forward, I think the important thing is to understand how we think about gross margin. This is a time of tremendous opportunity for us. The muscle that we've built during the past three to four years is that we think about reinvestments using cost of revenue and gross margin in a very disciplined way. We try to strike a balance between reinvestments and margin progression, and I think we have a pretty good track record of striking a good balance between these two things.

Christian Luiga, CFO

Should I give a little bit more flavor on the second quarter gross margin guide as you asked about that? We do have a very strong growth profile and we do invest at the same time on top of our core that is going really well. In quarter 2 we'll have some smaller, minor investments in different things. Some of them you will see today, some of them you will see when we get to Investor Day, and some of them you may see later. But it's a good flow we have right now, and we are very disciplined and working very hard in our weekly bets board to actually update ourselves to see what we want to do.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question is going to come from Doug Anmuth on AI products. Can you update us on your progress towards new AI products that would empower users to create new content and enable derivatives of existing music? What are the hurdles to launching these products? And do you expect that they would impact your cost structure or margin trajectory in any meaningful way?

Doug Anmuth, Analyst

Can you update us on your progress towards new AI products that would empower users to create new content and enable derivatives of existing music? What are the hurdles to launching these products? And do you expect that they would impact your cost structure or margin trajectory in any meaningful way?

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

Doug, this is Gustav. I'll take this. The generative market for music is really two things. It's net new music, which is happening at scale and quickly increasing the catalog. That is good for a company that aggregates content because it makes the recommendation prompt even more important. I joined Spotify in 2008 when the catalog was much smaller; today it's hundreds of millions of tracks. The growth of the catalog is not new and we think it will continue increasing. That means the recommendation prompt gets more important for consumers. But where we see a unique opportunity is that existing creators are largely left out of the AI opportunity today. Many new creators are using AI to make new music, but existing creators cannot join easily because the copyright problem is much more complicated to solve and the attribution problem of who should get paid what is much harder. We love hard problems, and that's the problem we want to go after. We want to take this opportunity to bring existing creators into AI with derivatives of existing IP. We have the capabilities and technologies we need. We are the right company to solve this problem. We think existing creators should participate in AI just as well as new creators.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question is going to come from Justin Patterson on productivity. We're seeing many companies wrestle with headcount investment versus rising AI costs. How is Spotify approaching this problem in gauging employee productivity?

Justin Patterson, Analyst

We're seeing many companies wrestle with headcount investment versus rising AI costs. How is Spotify approaching this problem in gauging employee productivity?

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

Yes, Justin. I mentioned this earlier but I'll reiterate: we are seeing tremendous productivity growth. You can translate that into different things. You could translate it straight into cost savings and cut headcount, which some companies are doing. The other thing you could do is keep headcount roughly the same and just do more. The third option is to invest aggressively because there's so much opportunity. Right now, we're going for the middle approach. We're keeping our headcount roughly flat and doing much more, shipping more value to consumers. On how we measure this, we use many proxies: technical metrics like pull requests and code volume; and more outcome-focused metrics like how much we actually ship. We have definitions of done (DODs) for any feature that we build. How many DODs are getting done? How many bets do we have on the bets board? All of these are increasing — not by 10%, but in many cases doubling. We're starting to see these things ship. With features like Song DNA and others, we're starting to see them translate into usage. Usage is a good predictor of retention, and retention is a predictor of revenue. We have three different monetization modes for features: the free tier to maximize reach, Premium subscriptions to bundle things, and top-ups like within audiobooks. We feel very good. We are diligent and disciplined, but we are not sitting around waiting for this opportunity to pass us by. We're taking the opportunity.

Alex Norström, Co-CEO

And just to give a little bit of historical flavor on that, some years ago we did a resizing of the organization. Since then, we haven't increased our employee base and we have been very diligent in keeping the overall platform stable. As of last quarter, we decreased by 65 people. It's not like we are growing headcount; we haven't done that for three years. It's been a disciplined approach.

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

I think Alex is too humble to state it himself, so I'll say it for him: Alex is the one who set this plan about three years ago to get Spotify to be profitable, and we've been executing on this plan. So we are very diligent with our cost.

Bryan Goldberg, Head of Investor Relations

All right. Our next question is going to come from Deepak Mathivanan on our ubiquity strategy. You have integrated Spotify and leading AI applications already, ChatGPT last year and Claude more recently. Can you talk about what type of traffic you're seeing and how consumers are using Spotify in AI applications at this time? And how are AI applications helping KPIs such as MAUs and time spent?

Deepak Mathivanan, Analyst

You have integrated Spotify and leading AI applications already, ChatGPT last year and Claude more recently. Can you talk about what type of traffic you're seeing and how consumers are using Spotify in AI applications at this time? And how are AI applications helping KPIs such as MAUs and time spent?

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

It's really all about AI today. Spotify has had a few core pillars: freemium, personalization and ubiquity. One way to think about this is simple ubiquity. Spotify was always going to be everywhere. We want to be wherever users are, including integrations with ChatGPT, Claude, et cetera. We track usage, engagement and costs very diligently, and we are seeing what we want to see. In terms of the type of traffic, it depends on the feature, but Alex mentioned that for the first time in Spotify's history we have the ability for users to tell us in plain language what they want. Old-school machine learning was a statistical activity based on clicks and streams. Now people tell us, in English or any language, that they're going for a run and want a certain BPM and cadence. We're getting a treasure trove of data that we are capturing and training on. This builds a unique advantage for us. I talked last time about the large personalization model, which is a model we're training based on open source models but trained on our proprietary data. This is not something that you can rent. We literally need hundreds of millions of people every day using the platform to be able to say what is trending in a certain region in India right now. Taste is not a fact; it is an opinion and it differs between people, markets and use cases. That's the kind of usage we hoped to see in Prompted Playlist and DJ, and that's exactly what we are seeing: advanced usage giving us data we never had before. We're heads-down serving those use cases better than anyone else.

Alex Norström, Co-CEO

Let me jump in a bit. It's important to explain how we think about things so you can apply that to other areas. When the music catalog grows and our content platform grows in volume, that's good for users and for the industries we're in. We optimize for the long term by focusing on lifetime value. How do we bridge an ever-increasing catalog with lifetime value? The number one reason people engage more with Spotify is personalization. If AI increases engagement for us, it generally increases personalization, and increased personalization engagement will lead to higher retention. That retention then translates to longer LTV, which in turn translates to enterprise value. That's how we think about the investments.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question is going to come from Eric Sheridan on operating expenses. Can you frame the key platform and product initiatives that are driving incremental operating expense trends? How should investors think about the trajectory of operating margins going forward?

Eric Sheridan, Analyst

Can you frame the key platform and product initiatives that are driving incremental operating expense trends? How should investors think about the trajectory of operating margins going forward?

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

I'll start, and then Christian can talk about trajectory. As I mentioned earlier, the OpEx spend is a mix of increased compute — not increased headcount — and sales and marketing to ensure we capture the value of the features we're launching. To give more detail on compute, it's a few different things. One is using tools, codecs and other developer accelerants to accelerate our development pace and building proprietary systems around that. I talked a little bit about Honk last time and we have more to share in the future. We are training rather large models in-house because we have unique data no one else has. For example, the large personalization model is not something you can rent or buy off the internet; you need our scale of users to make the model valuable. Some of the costs are upfront training costs and we'll capture that value when those products roll out. Some of it is direct productivity in development costs. So part is strategic investment and part is productivity investment.

Alex Norström, Co-CEO

When we see product-market fit with the features we launch, it leads to an opportunity to scale with marketing and awareness on top of our healthy core. It's all about awareness and product-market fit.

Christian Luiga, CFO

What we highlighted in the script is that the next two quarters will be a little bit elevated. We have a different pattern of product launches this year, which Alex referenced. R&D is extremely important for building the tech stack we deliver to customers. What we said and reiterate is that the operating margin will improve year-on-year.

Bryan Goldberg, Head of Investor Relations

All right. Our next question comes from Justin Patterson on the new free tier. For Alex and Christian, how are you judging the higher cost of the free tier versus subscriber conversion and your LTV framework? How does this compare to your expectations when rolling this out last September?

Justin Patterson, Analyst

For Alex and Christian, how are you judging the higher cost of the free tier versus subscriber conversion and your LTV framework? How does this compare to your expectations when rolling this out last September?

Alex Norström, Co-CEO

Justin, good question. I'll start and then Christian will fill in. We pay a lot of attention to the number of days in a month that users spend on Spotify. I'd much rather someone spend more days in a month rather than more hours per day, though ideally both. Internally, we talk about days-in-month as the lifeblood of our system. Since launching the more enhanced free tier globally, we've seen a consistent increase in active days in a month for free users. That step change means people like the free tier more — it's higher satisfaction and more usage. That will downstream lead to more subscriber conversion and eventually higher lifetime value. It has exceeded my expectations since we launched last summer.

Christian Luiga, CFO

Just to chime in: you may have noticed that in the quarter we had a negative development on the year-over-year gross margin for the ads business. That is really coming back to the increased engagement we have, and the engagement is driving more content cost right now than the income on the top line. The beauty and healthy part of that is we will be able to monetize that engagement as we go into future quarters and that will be a positive driver going forward. So it's a short-term issue.

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

I'll add that we have three monetization tools: the free tier for reach, Premium for average engaged users and top-ups to capture the most engaged head of the distribution. Until we launched the audiobooks add-on, we didn't have a tool to capture those very heavy users. We had a theory we could capture the whole power-law distribution and now with the audiobook top-ups and other tools we are proving it. These three tools give us levers to monetize more usage on the platform.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question is from Rich Greenfield on fitness. Fitness will undoubtedly drive increased video engagement on Spotify, particularly on TV screens. How does this impact your video ad business? And how should we think about the cost impact you will bear within the Premium business from adding this content?

Rich Greenfield, Analyst

Fitness will undoubtedly drive increased video engagement on Spotify, particularly on TV screens. How does this impact your video ad business? And how should we think about the cost impact you will bear within the Premium business from adding this content?

Alex Norström, Co-CEO

I know you love TV, Rich, so hopefully we'll see you using Spotify for fitness content. Think of this launch as doubling down on a behavior that's already happening organically on Spotify. When we launched podcasts and audiobooks, those behaviors were happening before we productized them. The TAM here is large: our research shows about 70% of Premium users work out monthly. Hundreds of millions of playlists are created for workouts and yoga. This is us doubling down on that trend. About 1.5 years ago when we launched the ad-free video experience for Premium users, we saw fitness creators organically upload a lot of video content. We connect creators like fitness instructors and users via our tri-modal economy: ads, subscriptions and top-ups. This is the same dynamic with fitness and we expect it to expand further. For example, I use it for tennis-related content before a tournament: recommendations for stretching, instructional videos, or even audiobook recommendations on mindset. We're happy to invest in this demand trend.

Bryan Goldberg, Head of Investor Relations

All right. Our next question is from Jessica Reif Ehrlich on ARPU. Have you seen anything unusual in subscriber reaction to your recent price increase? And could you talk about tools for further ARPU expansion from here?

Jessica Reif Ehrlich, Analyst

Have you seen anything unusual in subscriber reaction to your recent price increase? And could you talk about tools for further ARPU expansion from here?

Alex Norström, Co-CEO

We increased price around the world in the last quarter of last year and in the U.S. this quarter. No surprises at all from a churn perspective.

Christian Luiga, CFO

On tools for increasing ARPU over time, when you bring engagement and more verticals you can monetize more. On top of that, we've proven the model with audiobooks and top-ups as a way to bring more monetization on our platform from our subscribers. We continue to look at those elements.

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

I'll add a conceptual point. Many consumer products follow a power-law distribution of engagement: a long tail of light users and a head of heavy users. Spotify's model historically captured the long tail via a free tier and the average users via Premium. With top-ups like audiobooks, we can now also capture the head of the distribution. That gives us three tools to monetize more usage on the platform.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Steven Cahall on AI music. Does Spotify believe in an AI music creation tier? And if so, what are the sticking points with content partners and how might it be priced to Premium users?

Steven Cahall, Analyst

Does Spotify believe in an AI music creation tier? And if so, what are the sticking points with content partners and how might it be priced to Premium users?

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

Yes. We believe there is a lot of opportunity for creators who want to use AI tools, and importantly there is an opportunity that no one is addressing for existing artists. Existing artists shouldn't be left out of AI. Existing IP is often the most valuable IP, not the least. Right now, AI music tooling largely creates net-new content or leaves existing creators out. The copyright, attribution and payment problems make derivatives complicated. We want to solve that for existing creators so they can participate and be compensated. We think there's a big opportunity for creators, Spotify and investors in building solutions that enable derivatives of existing music in a fair and scalable way.

Bryan Goldberg, Head of Investor Relations

Okay. Back to Benjamin Black with another question on fitness. Yesterday, you announced a partnership with Peloton. Could you highlight the strategic rationale? Also, could you talk about the cost structure of this deal? How does this compare to audiobooks or the Spotify partner program spending? And is it reasonable to think monetization will follow a similar strategy to audiobooks in 2024/2025?

Benjamin Black, Analyst

Yesterday, you announced a partnership with Peloton. Could you highlight the strategic rationale? Also, could you talk about the cost structure of this deal? How does this compare to audiobooks or the Spotify partner program spending? And is it reasonable to think monetization will follow a similar strategy to audiobooks in 2024/2025?

Alex Norström, Co-CEO

Benjamin, good question. I like our partnership with Peloton. While we don't discuss the specific commercial terms, I can say this: the Peloton content we are putting into the fitness hub is ad-free and is high-quality content that normally lives behind higher-priced subscriptions. We're making that content available on Premium within the fitness category. In that sense, it's similar to how we've approached audiobooks and other premium content and experiences like the ad-free video experience for Premium users.

Bryan Goldberg, Head of Investor Relations

Okay. A question from Maria Ripps on advertising. Higher engagement among ad-supported users is clearly a positive. What needs to happen for that engagement to start translating into gross margin tailwinds?

Maria Ripps, Analyst

Higher engagement among ad-supported users is clearly a positive. What needs to happen for that engagement to start translating into gross margin tailwinds?

Alex Norström, Co-CEO

I think we need to continue the progress we've been making with the rebuilt ad stack: get more programmatic ad sales, which are growing fast, and look holistically at the whole system, including direct sales. As we scale biddable and automated channels and improve measurement and performance, we expect to translate increased engagement into better monetization.

Christian Luiga, CFO

I just want to reiterate that the quarter 1 gross margin dynamic was a short-term issue. We have said for some time that the second half of 2026 is where we see the growth picking up and the margin benefits coming through. We continue to see that as the path forward.

Bryan Goldberg, Head of Investor Relations

Okay. We've got another question from Doug Anmuth on tiering. You've recently shifted tiers to feature and product sets in a handful of markets, essentially enabling good, better and best versions of Spotify. What have been the early learnings with this move? And how could they apply to more mature or established markets?

Doug Anmuth, Analyst

You've recently shifted tiers to feature and product sets in a handful of markets, essentially enabling good, better and best versions of Spotify. What have been the early learnings with this move? And how could they apply to more mature or established markets?

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

I love that you paid attention to this, Doug. It's very early and we can't go into a lot of detail yet. Early indications are that when we deploy these value proposition frameworks we see a structural increase in ARPU. It may be too early to talk specifics, but the initial signal is positive.

Alex Norström, Co-CEO

We're positive about it.

Bryan Goldberg, Head of Investor Relations

Okay. Our next question comes from Sean Diffley on conversion. How should we think about the conversion of free-to-paid subscriptions in 2026 relative to prior years given the enhancements to the mobile free tier? And how much of the increase in marketing spend is related to this versus other features that are on the app now or coming later this year?

Sean Diffley, Analyst

How should we think about the conversion of free-to-paid subscriptions in 2026 relative to prior years given the enhancements to the mobile free tier? And how much of the increase in marketing spend is related to this versus other features that are on the app now or coming later this year?

Alex Norström, Co-CEO

I'll start on conversion: engagement and a thriving free tier are the best leading indicators of how our system spins. More engagement, more days-in-month and a thriving free tier will eventually translate to more retention and more conversion to subscriptions, generating lifetime value for the company.

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

On marketing spend, it's spread among many features. We try to market features that are differentiated. Many campaigns focus on Premium-tier features. The free tier often sells itself because it's free, but for new AI-driven features we do invest in awareness to capture the value.

Bryan Goldberg, Head of Investor Relations

All right. And our last question today is going to come from William Packer on AI. Investor concerns over AI disruption have increased. Could you outline the key moats for Spotify that limit the risk from, one, stand-alone low-cost, free AI music alternatives; two, large platform peers that offer free AI music services; and three, competition from AI-first alternatives, which integrate label content?

William Packer, Analyst

Investor concerns over AI disruption have increased. Could you outline the key moats for Spotify that limit the risk from, one, stand-alone low-cost, free AI music alternatives; two, large platform peers that offer free AI music services; and three, competition from AI-first alternatives, which integrate label content?

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

Thanks, William. I don't like the word 'moats' much; I prefer to talk about fair advantages earned through hard work. One advantage is our nearly 20 years of listening history and massive usage data. Taste is not a fact; it's an opinion and it changes across people, regions and use cases and it moves quickly with culture. That makes personalization a durable advantage because you need continuous scale and fresh data to keep those models valuable. We are building proprietary personalization models trained on our usage data — you can't rent that. If someone could snapshot our data and train a model, it would quickly become stale as culture moves. Regarding stand-alone low-cost AI music services, you might be thinking about different market dynamics such as China, where different content-gating economics apply. Spotify has never gated on content in most Western markets, so that specific risk is different for us. That doesn't mean AI can't change things; we see AI as opportunity both to expand the catalog with net-new music and to bring existing creators into the AI economy in a fair way. We think our scale, depth of proprietary data, personalization expertise and strong creator relationships position us well to compete in an AI future.

Bryan Goldberg, Head of Investor Relations

All right. Great. Thanks, everyone, for the questions. I'd like to turn the call back over to Gustav for some closing remarks.

Gustav Söderström, Co-CEO / Chief Product & Technology Officer

All right. Thanks, Bryan. This month marked our 20th anniversary — 20 years of building what once seemed impossible: innovating for artists, creators and authors, and shipping the best and most valuable experience for the world's most passionate and engaged fans. There is still a lot more to come from us. We hope you'll join us for our upcoming Investor Day on May 21 in New York. We can't wait to show you what it all means for the next chapter of Spotify's growth. Thank you, everyone, for joining.

Bryan Goldberg, Head of Investor Relations

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

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.