Spotify Technology Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 23, 2024

There are 4 speakers on the call.

Operator

Thank you for standing by. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Spotify First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

I would now like to turn the conference over to Brian Goldberg, Head of Investor Relations at Spotify. Brian, you may begin.

Speaker 1

Thanks, operator, and welcome to Spotify's Q1 2024 earnings conference call. Joining us today will be Daniel Ek, our CEO and Ben Kung, our Interim CFO and VP of Financial Planning and Analysis. We'll start with opening comments from Daniel and Ben, and afterwards, we'll be happy to answer your questions. Questions can be submitted by going to slido.com, slido.com, and using the code to Slido, you can e mail investorrelationsirspotify.com, and we'll add in your question. Before we begin, let me quickly cover the Safe Harbor.

Speaker 1

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 ks.

Speaker 1

And with that, I'll turn it over to Daniel.

Speaker 2

All right. Thanks, Brian. And hey, everyone, and thanks for joining us. I hope you've had the opportunity to review our shareholder deck. Overall, this was a solid quarter driven by strong revenue growth, expanding gross margin and the largest operating income we've ever posted.

Speaker 2

Our performance speaks to what I covered last quarter when I described our outlook for 2024, a year of solid progress with monetization and resourcefulness taking center stage. But let's discuss our MAU growth this quarter. We missed our target due to a bit of a slowdown at the start of the year. So I want to directly address the 3 main factors contributing to this outcome and how we're adjusting over the next few quarters. First, the MAU and subscription growth we

Speaker 1

achieved in 2023 not only surpassed

Speaker 2

our most ambitious forecast, we achieved in 2023 not only surpassed our most ambitious forecast, but also set a record for the most significant user growth in Spotify's subsequent year. Another significant challenge was the impact of every subsequent year. Another significant challenge was the impact of our December workforce reduction. Although there's no question that it was the right strategic decision, transition, I think we're back on track. I expect to continue improving our our execution throughout the year, getting us to an even better place than we've ever been.

Speaker 2

The third issue is related to marketing spend. In hindsight, we probably pulled back too significantly throughout 2023. And as such, we're already correcting this as we move into Q2. To be clear, we're not going to go back to what we were doing before. We still continue to expect improving profitability over the course of this year and into the next.

Speaker 2

Any new funds are being directed towards acquiring and reactivating high value users who enhance our base with their deeper engagement and loyalty. We expect to see good improvements in the second half of this year and in our ability to deliver top of the funnel growth at consistently high levels, maintaining our proven track record. So how do we expect this to impact our business in the coming months? Well, at Spotify, we don't rely on a single growth strategy, but rather adjust our focus based on what the business demands. For instance, 2 years ago, we really concentrated on our user growth.

Speaker 2

Then last year, we restructured our costs, and now we're focused on on accelerating revenue while improving our bottom line. Next year, our focus may return to top out of the following user growth. But in the near term, monetization remains our top priority. Bottom line, we are really good at pivoting our attention when it makes sense. When I say pivot, I really mean make making tweaks that will get us to an even better outcome.

Speaker 2

And because of our ability to do this, I have no doubt that we will be able to recapture top of the funnel growth over time as it becomes more of a focus area for the team. And before I turn it over to Ben to provide more detail into the numbers, I also want to mention our new CFO, Christian Louiga. I've worked with Christian directly, and I can tell you firsthand that he's a terrific leader and excels at driving both operational efficiency and growth. He has an impressive track record, and his expertise will be incredibly valuable as we continue on this path. I look forward to you getting to know him when he joins later this year, but I also want to extend a huge thank you to Ben for stepping to the role of Interim CFO and helping to ensure a smooth transition.

Speaker 3

Thanks, Daniel, and thanks, everyone, for joining us. I'd like to add a bit more color on the quarter and then touch upon the broader performance of the business and our outlook. Q1 marked a strong start to the year, led by accelerating revenue growth and record setting profitability as our focus on monetization and efficiency have begun flowing through our financials. Although MAU variability was greater than expected, our funnel continued to expand at a reasonably healthy rate within the context of the last few years, as total MAU grew 19% year on year in Q1 coming off of 2023's record performance, while quarter on quarter net additions of 13,000,000 were in line with 2021 2022 levels. On the subscription front, the business grew in line with our guidance, adding 3,000,000 net new subscribers.

Speaker 3

Total revenue grew 21% year on year on a constant currency basis to €3,600,000,000 representing representing 100 basis points of growth improvement relative to Q4. Notably, our recent price increases and improving product mix shift accelerated premium ARPU growth growth to 7% year on year on a currency neutral basis, while our advertising business saw improved currency neutral growth of 19% year on year versus Q4 17%. Moving to profitability, we are very encouraged by the business' early stage inflection towards the targets we laid out for you at our 2022 Investor Day. Gross margin came in at a Q1 record of 20 7.6%, surpassing guidance by 121 basis points and resulting in our first ever €1,000,000,000 plus gross profit quarter. As you're well aware, there are many components that can move our gross margin, and Q1 performance was primarily driven by new record, aided by gross profit strength and lower operating expenses.

Speaker 3

Operating income was impacted by €82,000,000 in social charge accruals, which were €74,000,000 higher than our forecast, driven by share price appreciation during the quarter. As a reminder, we don't forecast share price movements in our outlook for the business since they are outside of our control. Finally, free cash flow was positive €207,000,000 in the quarter. Performance here reflected the expected reversal of some of the timing benefits we saw in Q4. We remain confident that we've entered a new chapter in terms of expanding the business' cash generation potential.

Speaker 3

Looking ahead to 2nd quarter guidance, 2nd quarter guidance, we are forecasting 631,000,000 MAU, an increase of 16,000,000 from Q1 and 245,000,000 subscribers, an increase of 6,000,000 over Q1. We are also forecasting a currency neutral revenue growth rate of over 22% year on year, pointing to €3,800,000,000 in total revenue. We also anticipate a gross margin of 28.1 percent and an operating income of €250,000,000 In terms of our user growth outlook, as Daniel mentioned, we've made some adjustments to further optimize our marketing activity and expect improving MAU net ad levels over the course of the year. With respect to price increases and subscriber growth in Q2, our data shows that historical price increases have had minimal impacts on growth. However, much like Q3 of last year, we are baking in some modest levels of churn into our Q2 outlook.

Speaker 3

Additionally, we anticipate another quarter of sequential improvement in ARPU growth on a constant currency basis in Q2, similar to the 200 basis points of improvement we saw from Q4 to Q1. From a profitability standpoint, we continue to expect a sequential ramp in gross margin through the balance of 2024 as well as improvements in operating income and operating margin. With that, I'll hand things back to Brian for Q and A.

Speaker 1

All right. Thanks, Ben. And again, if you've got any questions, please go to slido.comspotifyearningsq124. We'll be reading the questions in the order they appear in the queue with respect And our first question today is going to come from Agnieszka Pustula on music profitability. Can you please give us some detail on the improved music profitability in the quarter?

Speaker 1

Which marketplace product was the key driver behind better margins? And how much of extra cost did audiobooks add?

Speaker 2

All right. I'll start and maybe, Ben, you can add to the answer. So I think to up level the answer a little bit and talk about gross margin in general, this was a real outperformance on many levels and there were many things that contributed to that. So you mentioned marketplace. Marketplace did really well in the quarter and it continues to have a great position on really all of our marketplace products growing nicely.

Speaker 2

So I feel really good about marketplace, and that was a big contributor. In addition to that, obviously, on the gross margin side, we saw lower non music costs. Some of that was aided by both our audiobook side, but also on a podcasting side. Last year, if you remember, that was a bit of a drag on our gross margin. And this year, we expect profitability for the podcast segment.

Speaker 2

So that's adding to that. Also, you saw lower streaming delivery costs and overall cost, sort of other cost of revenues due to some of that sort of resourcefulness and that culture. So I think, from my side, it is really a new Spotify you're seeing where we are being relentlessly resourceful in all of our costs and in driving improvements in efficiency on all our different drivers that are adding up to this gross margin number.

Speaker 3

Yes. I think you covered it well, Daniel. I think I would just add that resourcefulness that you highlight is spanning a diversified set of levers that are all adding up to this narrative. So, I think it's really sort of firing across many cylinders for our business.

Speaker 1

All right. Our second question is also going to come from Agnieszka, this time on royalties. For the bundled music and audiobook plans, are royalty payments for each category based on a fixed allocation of relative value of music versus audiobook plans? Or is it based on the actual share of consumption, I. E, would increased audiobook consumption reduce music royalty?

Speaker 3

I think this is a great question. We won't be able to get into the specifics here, but I think you are touching upon a very important point that I'll try to up level towards. It's a fairly complex machine across our content types, and we do have a concept that I'll refer to as shifting profit pools now. So, across our content types, we have all types of cost models. We've got variable ones, so that could be anything from revenue shares, per user models, per hour models.

Speaker 3

We also have fixed cost models. It's a fairly complex machine, and the concept of bundling things together allows us to tap into a strength of ours, which is leaning into this complexity across profit pools and managing it efficiently as we look to meet and serve customer demands where we see it. So I think it's as simple as that.

Speaker 1

All right. Our next question is going to come from Justin Patterson on capital allocation. Daniel, the balance sheet is in a solid position, and you could be approaching over 2,000,000,000 dollars in free cash flow in 2025. Given this, how will you and incoming CFO, Christian Louiga, look to reevaluate your capital allocation policy?

Speaker 2

Yes. I do appreciate the question, Justin. And it's certainly a new type of problem for Spotify to be dealing with. I think it's a little bit too early to draw any sort of real decisions yet on our side. And obviously, Christian hasn't started yet, but this will be on his table to look at and to work with myself and the board around what we do.

Speaker 2

I do want to note to investors though that we do have the upcoming convert. So that's certainly one use of capital we could use into the future. But we have many, many tools at our disposal, so we look forward to discussing those as the year progresses.

Speaker 1

All right. And a follow-up question for Justin, this time on product. Daniel, you appear to be shipping product at a faster rate. How do you view this as sustaining the 20% plus revenue growth rate over time? And do you believe the improved product capabilities can make you less reliant on marketing over time?

Speaker 2

Yeah. I mean, you're exactly right, Justin. We are focused on shipping more product and better product for consumers. And the way you should think about this as investors is the better we can improve the product, the more people engage with our product and the more value we ultimately create. And the more value we create, the more ability we will have to then capture some of that value by price increases.

Speaker 2

So I've mentioned this concept before, but we're really, really focused as a company on this value to price ratio. And the way we're thinking about it is we're constantly trying to improve the value we offer to consumers. And every now and then, we look at that sort of value to price ratio and try to capture some of that value through price increases. And when we do, not only Spotify benefits, but the entire creative ecosystem benefits too. And that's obviously, you know, everything from artists and songwriters to authors and podcasters now that are part of this strength or this bundle, so to speak, where everyone sort of all the rising tide helps all boats, so to speak.

Speaker 2

So long term, you should definitely say that the better the product is, of course, the less reliant we will be on marketing because the more viral the product will be and, of course, the less we have to reactivate consumers to come back to the service as well.

Speaker 1

All right. Our next question is going to come from Rich Greenfield on audiobooks. There's been speculation that you will launch a premium tier that excludes audiobooks for $10.99 while the audiobooks goes to $11.99 I'm curious if that's needed to improve the cost structure of your audiobook offering. Could you help us understand the margin profile of the audiobooks business?

Speaker 2

Yeah. I'll start here and maybe Ben can add. So Rich, I think my sort of last answer kind of captures this. What we're focused on at Spotify is really we're trying to improve as much value as we can. And over the course now of the last 2 years, we've added a tremendous amount of value.

Speaker 2

We've added, of course, more and more podcasts than ever before, millions of podcasts now. We have a library of over 100,000,000 music tracks now onto the service. We've added audiobooks in many markets. More than 25% of our base are now using that. And I think I saw something online where you were talking about whether or not people were engaging of that 25% of users.

Speaker 2

In the 1st 14 days of new users using audiobooks, we see over 2.5 hours of incremental usage on the audiobook side. So we're seeing some great results. And, of course, we've added video too, both on the music side but also on the podcasting side. So we're adding a tremendous amount of value over the course really of this last 2 years on the service and more and more product features like AIDJ, Daylist and so on. So we're adding more value across the base and we're focused on capturing some of that value we've been adding over the past 2 years by increasing the price.

Speaker 2

And obviously, you're mentioning the U. S. Numbers, but in many territories, we have been doing even more price increases. Sometimes that's due to local dynamics. Sometimes that's also due to inflation and other things that are contributing, too.

Speaker 2

So it's really a mix of many different things that we're considering as we're raising prices. But the main one, if I want to focus you on 1, is really around value to price ratio and keeping that very healthy where we're obviously offering a lot more value to consumers than what we're capturing through the price increases. But I feel really good about us doing that. That's also why you saw us having a healthy guidance on the subs number, too, because we think consumers like what they're seeing from Spotify. They love the offering and they feel that the value that they're getting is more than fair.

Speaker 1

All right. Our next question is going to come from Doug Anmuth on MAU. Q1? Was moderated marketing activity as expected, or were campaigns less effective at the top of the funnel? And does organizational change just reflect increased discipline and higher LTV to SAC thresholds?

Speaker 1

Where is that ratio versus historical levels?

Speaker 3

Absolutely. I'll take that and I'll start with it and maybe Daniel, you can add if you have any other thoughts. I think it's important to first start my answer here with just a bit of look back context. So, we started honing in on marketing efficiency as we entered 2023, so more than a year ago. And when we began pulling back on spend last year, we had other tailwinds working for us that more than counteracted this and drove the record year for us.

Speaker 3

So, these included product changes and innovations that we made as well as benefits on the competition side, with certain competitors sort of exiting different markets. We also had a super strong end of year effort with activities such as Wrapped and our campaigns around the holiday and the new period. So, all these things contributed to what otherwise was observed as the variability on Q1. That said, we've had some great learnings and insights from this performance. Notably, as we've talked about sort of it in as Daniel mentioned, thinking about sort of our marketing spend and how we calibrate that.

Speaker 3

I think you're right to call out that we are very focused on sort of a high LTV to CAC threshold. We also want to make sure that we're sort of capturing all of the opportunity under sort of the investment curve that we have in different markets. And I think it's important to sort of strike that balance in making sure we capture the opportunity while staying disciplined and making sure that we're focused in the way we target high value users across the board.

Speaker 1

All right. Next question from Justin Patterson on education. Daniel, could you please frame the opportunity you see in education? How would you characterize the investment to succeed here versus what you had to invest in podcasts and audiobooks? What would cause you to expand beyond the UK?

Speaker 2

Yeah. I mean, this is very, very early days. For those of you that may not know, we've rolled out an early test in the UK where we have an educational offering for consumers. Long term education remains obviously a huge potential opportunity for Spotify. But it's too early to say what the results is of the specific test that we have.

Speaker 2

But as many things with Spotify, maybe to up level a little bit, is that oftentimes we either see consumers or creators tapping into a need. And quite often what ends up happening is that creators are using our platforms for things that we may not have initially intended it. So a long while ago, we added the ability to have certain podcasts behind a paywall. And what we were seeing was that some of these podcasts were actually having courses available for them so that you can consume that and unlock them via Spotify, which is a great use case. Now, the problem of that, obviously, is that this has been a far than really a great user experience for consumers.

Speaker 2

So people are hacking our system in a positive way to do more things on it. And this is exactly how audiobooks started for us, too. So audiobooks started in Germany for us where the music labels had a bunch of audiobook rights and were uploading these audiobooks to our books to our platform, and they started seeing great consumer success. And similarly, on education, we've started seeing how people are using Spotify for educational purposes. And what we're trying to do now is obviously create a much more compelling consumer experience for said education, and we're adding more tools that allows these educators to communicate not just via audio but also via video and adding more and more ways for them to engage in that way.

Speaker 2

And I think, long term, if you squint and see that, education remains a massive opportunity. And the internet should be poised to create an unparalleled user experience where some of the world's best educators and creators and storytellers should be able to help lots of consumers. So what you can see, if you're a consumer in the UK at the moment at the start is you're going to see lots of really cool ways where, for instance, you can learn how to become a better DJ, using Spotify or learn how to play the guitar It's some really amazing content that's on there by creators. And a lot of these creators were already doing podcasts, and they're now adding ways to up monetize their fans by creating amazing content that allows them to get better at their craft. And I think that is the trend in education.

Speaker 2

You guys know this, but more and more, consumers are relating to other people. They're not necessarily related to faceless brands. And so this is a huge trend in education that we're very excited about.

Speaker 1

All right. Our next question is going to come from Mike Morris on pricing. S. Later this year. Can you provide an update on pricing changes for this year?

Speaker 1

How will you approach pricing increases by plan and unique pricing for audiobooks or other premium features?

Speaker 2

Yes. I'll start and maybe Ben can add. We don't preannounce anything we're doing on the any particular type of price increase. But as I said, the general thinking, if you want to understand how we're thinking, is it is really about value to price ratio. So, we're constantly looking at how much value we're adding, how are consumers in that market responding to that value that we're adding, and then what is the fair price to have a good value to price ratio?

Speaker 2

And we're doing this in multiple ways, of course. One is adding value into this bait steer, but the other way is to increasing the choice for consumers. So I do want to point to that a little bit more here. So you've seen us over the years to add more ways for consumers to choose different plans on Spotify. And it originally started off by being sort of just a single person plan and it then went to a family plan.

Speaker 2

And then we added Duo and then we added various ways of paying for these family plans for instance, Southeast Asian markets where you can have a day pass, a week pass and so on. So just a lot more flexibility. And you should think about that we want to offer as much flexibility as possible in this next stage of Spotify to now because we're at the size where we want to appeal to an even larger base of consumers to turn to one of our subscription offerings. So that obviously means that you'll see things like, for instance, the audiobook only tier that was referenced earlier here. You should also expect to see a music only tier as well.

Speaker 2

And all of this is in line to just offer as much flexibility to consumers as possible for them to pick whatever plan they feel offers the best value to price ratio for them.

Speaker 1

Okay. Next question will be from Benjamin Black on gross margins. There was a big step up in gross margin in the quarter and for the 2nd quarter outlook. Were there any one timers? Or is this a new trend?

Speaker 1

How should we think about the cadence of gross margin expansion for the balance of the year?

Speaker 3

Thanks, Ben. This is a great question. I'll start just by reemphasizing what we've been saying a few quarters in a row now. We feel really confident about the gross margin trajectory and the sequential momentum we have. So, consider this a real trend and not just a function of one offs.

Speaker 3

As I said in my prepared remarks, we have a lot of moving parts, as is the case every quarter: non music, music, marketplace, to name a few of the major areas. We also had movements in other cost of revenue, such as continued favorability with cloud costs, as Daniel mentioned. So there are a bunch of things driving the upside. From a year on year perspective, it's the continuation of the trends we talked about last quarter that I mentioned too: music improvements driven by the growth of our marketplace business, our continuing pivot to profitability in podcasting and also optimizing other costs of revenues. For Q2, we see momentums from these same areas persisting.

Speaker 1

Okay. And we've got another question from Doug Anmuth on Investor Day goals. You often say that Spotify is well positioned to deliver on the 2022 Investor Day goals, but the company's changed a lot since then. Were the changes that you've made and the newfound discipline required to actually deliver those goals? Or should you now have upside because Spotify is being run very differently?

Speaker 2

Yeah. I mean, one of the things we talk about at Spotify is, obviously, this change is the only constant. It's a sort of mantra I have internally. So that we're changing is not perhaps something you as investors should be all that surprised about because that's the only thing we pride ourselves internally with. And you can see that in some of my opening remarks too about sort of how we pivot focus internally as well.

Speaker 2

But I think maybe to set context on the 2022 Investor Day, the 2022 Investor Day wasn't as much backward looking as it was forward looking. So what we tried to do then is to outline where we were going. We used both we used both internally and externally pretty much at the same time to kind of set the directions for the team. And in there, we talked about the Spotify machine And the Spotify machine being that this isn't just a sort of one trick pony anymore, but it is actually multiple verticals working together to provide a consistent, great story around just more and more choice for consumers that drives more and more engagement because, you know, you may come for the music and stay for the audiobooks, and some consumers may come for the podcast and stay for the audiobooks. So there's just going to be more ways for people to interact with it.

Speaker 2

And the machine takes care of all the complexity on the back end to deal with, you know, what was historically a very difficult problem to solve, which is multiple business models in one consumer experience. And so that's the sort of key arc of what you're seeing contributing to this story. Now, specifically related to the resourcefulness, I do agree that we've made a harder pivot to that than we probably initially planned. But if you walk back to some of our comments, we did say that 2022 was an investment year and that we also would go back eventually to focus on something else. Obviously, that was a harder pivot in 2023 than we initially planned to do.

Speaker 2

And I think that served us well. But I would say it's really in the eightytwenty story. 80% is pretty much the same, but we're actually delivering on all the things we said in 2022. And 20% is there may be some added upside by us just being a more resourceful company. And I'm certainly surprised in a positive way by the resilience and the resourcefulness that the teams are showing on some line items like marketing and cost of delivery, just to mention 2 examples.

Speaker 2

So I think we can be a better company than even what I said in 2022, but I think you shouldn't see this as something very different than what we outlined. It is pretty much the same, but hopefully with a little bit crisper execution on it.

Speaker 1

Okay. We've got a question from Rich Greenfield on TikTok. With the U. S. Government set to ban TikTok barring court intervention, how are you thinking about the opening that could create a music discovery and short form content tied to music?

Speaker 2

Yeah. I'm not going to comment on other companies and related on their strategy or what may happen with their regulatory proceedings. But obviously, what I can say is that we are focused on winning discovery, and we're going to add as many ways that we can to improve the discovery of Spotify. So you saw us in the quarter add music videos. You're going to see music clips in a bigger way.

Speaker 2

You can already, today, if you open up the apps, start seeing more and more videos on the music side where artists are engaging with fans. Those in a similar way like a Reels product that TikTok did a few years ago. So I think the whole industry, you know, TikTok and other companies have obviously improved the user experience. We're all as an industry learning about these trends and best practices and trying to improve our products. So that's what great competition does.

Speaker 2

It helps improve for everyone. And of course, we are not any different than anyone else in that we're trying to learn from the marketplace. We learn what consumers like. We try to improve upon it and make the best possible user experience. So short form music content is a big focus of ours.

Speaker 2

You're going to see more video on the music side make its way into the product in 2024. And 2 other things, by the way, that you're going to see is, of course, more AI products in the music side as well. And in addition to that, I believe you're going to see an even more global music ecosystem than any time before in history. So we're excited about all these sort of 3 core trends in music.

Speaker 1

All right. We've got a follow-up from Rich Greenfield on top line growth. Daniel, in the short video you created on the quarter, you sounded very pleased with your 20% percent revenue growth rate. Premium has been the key driver aided by price increases. Curious, how should we be thinking about advertising growth going forward?

Speaker 1

Can it start to increase your overall growth rate and grow 20% plus?

Speaker 2

Yes. You're right that our premium product was sort of the big driver of the quarter, and we felt really good about that. And Ben can add to this, but we saw a lot of strength in the quarter as well as it relates to advertising. You know, I think it's a little bit early to say on my side how the macro on the advertising side will develop, but I remain cautiously optimistic that we're seeing some really good growth. But again, just to remind investors, the reality is even if advertising will become a better part of the story, it's still a relatively small part of our overall revenue mix.

Speaker 2

So anything we can do on our subscription side will obviously materially outperform any improvement on the outside. So don't think I'm not excited about advertising, but it just happens to be that subscription side obviously is the bigger part in order to get to the 20% revenue growth. Did I miss anything, Ben?

Speaker 3

Yes. I think I would just add that even in the most recent quarter, ads was just shy of the 20% mark. So we are getting quite close to sort of a kind of almost parity growth rates between the two segments. I would just say that sort of in the near term, we continue to see strong growth in supply and monetizable impressions. So we're just very focused on making sure we're optimizing across all channels to meet the growing demand as budgets continue to unlock sequentially each

Speaker 1

quarter. Okay. We've got a question now from Benjamin Black on Universal Music Group. Could you talk a little bit about your expanded relationship with Universal Music Group that was announced this quarter? What are the key benefits for you?

Speaker 1

And where could we see the biggest impact to the financial model?

Speaker 2

Yeah. I mean, generally speaking, we're always just to set expectations. We're always sort of working with our partners across all different content mixes and, of course, the major labels too. And a huge part of what we're trying to do is operationally improve and allowing us for more flexibility to work together. And that means to allow the teams on the various side you know, give more opportunities to experiment on the platform with rights.

Speaker 2

And so a way of showcasing that is really, for instance, around the music videos that now are in in, I believe, 11 or 12 markets around the world. So that's a great way of just showing how, you know, we work with our label partners across the board. You're also going to see music clips show up in a bigger way where artists are using ways of short form storytelling on video to, you know, tell a story around their album or, you know, tell fans about a new album drop that they should be pre saving. So there's lots and lots of innovation that's happening together with our label partners and artists, alike. And, UMG is obviously a very important partner to us just as the other major labels and independent labels are, too.

Speaker 2

And I think long term, the way to think about that from a financial impact point of view is really the more we can improve engagement, the more value we're creating, the more ability we will have eventually to capture some of that value through price increases or more inventory that then drives, advertising, which, of course, is to the benefit not just of Spotify, but is the benefit of the entire creative community.

Speaker 1

All right. Our next question is going to come from Rich Greenfield on music royalty rates. How does the recent launch of an audiobook $9.99 unlimited product impact your statutory music royalty rates? Why are publishers concerned? Yes.

Speaker 2

I mean, so first, I talked about this, but a huge part in this next phase of Spotify is really to allow for more flexibility for consumers. So we went from a single plan, $9.99 back in the day to then improving family plans to then adding Duo to then having day pricing, week pricing in certain markets. And now you're seeing an audiobook only Tier, and you're going to see eventually a music only Tier 2. So that's on the specific around the offering side. You will see a lot more sort of tiers that allows for more flexibilities to consumers to opt into the type of deal that they believe offers the greatest value for them in terms of how they're using Spotify.

Speaker 2

Now specifically to our content partners, while I won't comment on any specifics, what I would say is that, of course, this is the sort of natural tension between suppliers and distributors. There's always a tension around payments. Now to level set this, we did our loud and clear a while ago, but I think it's important to note that Spotify in 2023 had record payouts to the entire creative community and global publishing revenue will hit a record for hit hit a record for 2023, and we will pay even more in 2024. So I feel really good about where we are relative to our partners and the fact that we are growing the creator ecosystem. And that still remains our goal and I feel good about delivering on that goal too.

Speaker 2

So yeah, of course, there's always going to be tension between that sort of supplier distributor thing. But I would say, we are on track for a better 2024 for songwriters and publishers. So I feel good about delivering lots and lots of value. And relative to the CD era, publishers and songwriters are faring way better in the streaming economy. So I feel good about that.

Speaker 1

Okay. Our next question is going to come from Jess Gareef Ehrlich on advertising. This past quarter, The Trade Desk called audio a key area of growth for their business. Programmatic advertising is currently a small part of your business. Can you provide some color on the growth opportunity in programmatic and advertising in general?

Speaker 3

Thanks, Jessica. It's a great question. We believe, as you sort of framed in your question, that programmatic is a growing and important part of the mix, and we're bullish on this channel long term. It's an opportunity really for all to participate, small, mid, large size enterprises and businesses across the board. As Daniel mentioned kind of in a prior answer, ads is still the smaller part of our mix.

Speaker 3

And as you call out in your question, programmatic is also a small part of that smaller portion. Right now, as I said in my prior answer related to advertising, we just continue to sort of focus on optimizing across all formats and delivery channels to meet the opportunity where it is. In terms of near term opportunity, again, very focused on 2024, we continue to watch closely but are encouraged by what we're seeing as advertiser budgets unlocking sequentially each quarter. And we've got some good macro trends momentum heading into the summer and the second half with global events like the Euros, Olympics,

Speaker 1

Great. Okay. We actually have time for one more question, and that's going to be a follow-up from Jessica Reif Ehrlich on Christian Louga. You recently announced Christian as your new CFO. Daniel, what about Christian's capabilities or skill set do you think will be most additive to Spotify?

Speaker 1

And what will Christian's top priorities be when he joins the company?

Speaker 2

Yeah. So, I've actually seen Christian firsthand for quite some time, just as a sort of fun anecdote. So Christian was part of the team at TeliaSonora that made the Spotify investment in 2015. So he's very familiar with the company and myself and Martin Lawrence and the other co founder of Spotify. So we know Christian quite well, and it's been fun to follow his progress from afar, obviously, at Telia, Sonra, and then going to Saab, tackling different industries, but kind of always with a consistent great track record.

Speaker 2

And that's a track record of improving the bottom line, but at the same time, be very, very focused on driving a much better business even on the top line too. And I think that's the sort of key thing that got me and the rest of the team to be excited about him too because this is a person who's been at many different industries and seen many different things. And this is not just someone who's focused on optimizing on the bottom line by cutting costs but actually someone who focused on what's right for the business, even on the top line, too. And that feels like the right fit for us. So we're very excited about that.

Speaker 2

And really, the top priorities as he comes in is to be focused on, together with the team, on driving even further improvements, on being resourceful. That is our sort of key mantra. We think we still have more ways to go when it comes to that, so we're excited about that. And then, one of the questions here alluded to sort of capital allocation. So I'm sure that will be one of his top priorities together with myself and the team, too.

Speaker 2

So we're excited about it. But, yeah, he's going to be a great addition, I think, to the team. And I look forward to all of you guys meeting him as well.

Speaker 1

All right, great. So that's going to conclude our Q and A session today. Thanks, everyone, for the questions. And now I'd like to turn the call back over to Daniel for some closing remarks.

Speaker 2

All right. Well, thanks, Brian. We've talked about 2024 as the year of monetization. And I think we're really delivering on that ambition. Now as we've shifted the focus on strong revenue growth and margin expansion, we see a clear opportunity to ensure we're also continuing to grow the top of our funnel.

Speaker 2

I feel good about the changes we're implementing and remain very confident in our ability to reach the ambitious plans we've outlined. So thanks, everyone, for joining us, and I look forward to speaking to you next quarter.

Speaker 1

Okay, great. 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.

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Earnings Conference Call
Spotify Technology Q1 2024
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