Spotify Technology S.A. (SPOT) on Q2 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Spotify Q2 2021 Earnings Conference Call. At this time, all participants’ are in a listen-only mode. I would now like to hand the conference over to your speaker today, Bryan Goldberg, Head of Investor Relations. Thank you, sir you may begin.
Bryan Goldberg: Thank you, and welcome to Spotify’s second quarter 2021 earnings conference call. Joining us today will be Daniel Ek, our CEO; and Paul Vogel, our CFO. We’ll start with opening comments from Daniel. And afterwards, Daniel and Paul will be happy to answer your questions. Questions can be submitted by going to slido.com, S-L-I-D-O dot com, and using the code #SpotifyEarningsQ221. Analysts can ask questions directly into Slido and all participants can then vote on the questions they find the most relevant. We ask that you try and limit yourself to one to two questions, and to the extent you’ve got follow-ups, we’ll be happy to address them, time permitting. If for some reason you don’t have access to Slido, you can e-mail Investor Relations at ir@spotify.com and we’ll add in your question.
Daniel Ek: All right. Hi everyone, and thank you so much for joining us. I will touch briefly on the quarter and then offer context for some of the opportunities I see across our business. All along, we've been pretty clear that our outlook for 2021 included a higher degree of variability, given the ongoing uncertainties of the pandemic, and the uneven recovery worldwide. And with the exception of MAU, we've had another strong quarter, which is apparent in the solid outperformance of all other metrics. And while I'm disappointed that our MAU growth was softer in the last half of Q1 and the first half of Q2, the good news is that we've seen the trend line reverse, and all the leading indicators I'm seeing show that we're back on track. And there's a lot to learn for us on the MAU shortfall, markets like India, Brazil, and parts of Southeast Asia lag behind our expectations. And we've also seen slightly slower adoption rate in some of our newly launched markets, all these regions have been hard hits by COVID. Ultimately, we lost about a quarter of growth between Q1 and Q2, and in hindsight, we'd likely underestimated the acceleration we saw in MAU growth in 2020. All that said, I feel really, really good about what we're seeing. Taking a bigger picture view and looking at the last two years, average together, we're still on track to outpace our MAU growth in these two previous years. 2020 was a bit of an outlier. Companies rarely grow in a straight line, and nothing in our data changes our long-term outlook, and the audio opportunity for Spotify. In fact, if there's one thing that has surprised me the most during COVID, it's been how effectively we've been able to dream up and accelerate the roll-up of new innovations in the midst of tremendous disruption, while also executing against our existing roadmap, and long-term, I believe speed of iteration will be a key competitive differentiator. So there's a lot of positives that we also bring with us from this.
A - Bryan Goldberg: Thanks, Daniel. Again, if you've got any questions, please go to slideo.com #SpotifyEarningsQ221. 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 appear in the queue with respect to how people vote up their preference for questions. And the first question today is going to come from Ben Swinburne. Can you provide some data during the first half of the year that supports the view that MAU weakness is driven by COVID related factors? For example, are the regions performing better or worse, whether variants can be explained by different phases of lockdown reopening or economic stress?
Daniel Ek: Yes. Thanks, Ben. So we can and we've looked at this and so there's a couple of things I would highlight. So first is we know in general that engagement leads to better MAU and better retention. And so where we have markets where engagement is high, we're seeing positive trends and where engagement is not as high, the trends aren't as great. And so how can we measure that? Well, there's a couple of ways; one, is what we've noticed in markets that were COVID is significant either lockdowns are significant or the spread is significant, you're seeing less mobility, and in markets where you're seeing things more open, you're seeing more mobility, and more mobility leads to higher engagement, which tends to lead to higher retention and better MAU. So we've seen it in that data. We've also seen it as we've talked about in the past when we first went to COVID, we mentioned that everyday looked like the weekend, meaning everyday had similar types of patterns that were like a Saturday or Sunday, you didn't have the normal cyclicality in the day through your commute. And what we've seen is, again in markets that are more open in markets that are where it's less of an issue, you're seeing a little bit more return that cyclicality weekdays are starting to get back to the way they normally are with that cyclicality and that usage and engagement. And in markets where COVID is still bad and were still in lockdown phase those midweek days are still looking like weekend days, and so we can see it in that data as well. So that's, kind of, a nutshell thinking about it from the engagement and metrics perspective.
Bryan Goldberg: All right. Our next question is going to come from Matt Thornton, another one on MAU’s, I’m wondering if you could expand on, or quantify the impact of the intake issue you experienced with a third-party platform. And again, what gives you confidence that slower MAU growth is a function of COVID as opposed to a function of price increases, competition and/or saturation?
Paul Vogel: So I'll take the first part now, I guess I'll let Daniel take over the second part. So with the third-party platform that was an issue with email verifications between us and the third-party. In full disclosure, this was an issue on our end, we made a change that was not constant enough and we believe it had an impact on growth. The estimate right now, was about $1 million to $2 million of MAU growth was impacted by the friction created by this email verification change, it's since been corrected and shouldn't impact -- should not be an impact in Q3. In terms of the first half of the second part of that question, again, it talks about COVID, I think I mentioned it in the last question, I will say we obviously don't think its price increases, because our subscriber growth was actually slightly better than expected. So price increases would really have a bigger impact on subscriber growth as opposed to for user growth, and then maybe I'll let Daniel talk about competition and saturation.
Daniel Ek: Yeah, I mean as Paul, kind of, outlined both in this question and in the last one. Most of the underperformance we saw were in emerging markets and not Western markets, so as it goes to the question of saturation et cetera. Those are also in markets where we're in much earlier stages of growth, rather than the bigger markets like the US, and most of Europe, as well.
Bryan Goldberg: All right. Next question is going to come from Mike Morris. How did churn compare for subscribers seeing price increases during the first half of 2021 versus those who didn't, as it varied meaningfully by market, and what's your view of future price increase potential for standard subscribers or additional increases for other plans?
Paul Vogel: Yeah, so your churn was down year-over-year and quarter-over-quarter, which is great, we don't get into specifics about regions or geographies, or products. I will say that in the markets where we increase prices things performed in line with expectations if not slightly better. There was, in terms of thinking about things from a gross intake perspective, or from a term perspective, again, everything was in line or slightly better. So nothing there to call out at all in terms of an impact from price increases. We are continuing to roll this out, we've tested a number of markets it's, I'm not really going to comment on whether or not we'll rollout into more markets, or more standard plan, or family plan but you can imagine we're going to continue to test and experiment with all different offerings. And again, we're excited about how the trends have been so far in the markets where we have raised prices.
Daniel Ek: Just maybe to iterate on the strategy here. The strategy for us is really all focused on increasing engagement. If we increase the engagement, the value per hour increases of our customers and as we're seeing that we will be proactive in raising prices when we believe that ability exists. So it's more aligned with the engagement of our customers rather than maybe some may have speculated competitive sets, et cetera. And that's what we feel so good about when we have raised prices is both the engagement staying very, very strong. And the fact that, as we've said many, many times, we have more than two or even 3x and sometimes the amount of engagement per user than some of our competitors do. And obviously, that means that there's a very, very loyal customer base there. And I think that's what you've seen play out in the business and why subscriber growth has been so strong as well.
Bryan Goldberg: Right. Next question is from Justin Patterson directed to Daniel. At StreamOn, Daniel, you talked about one billion user opportunity for Spotify, given the degree of growth that implies. What are the key investments you need to make to deliver on that target?
Daniel Ek: Yeah. I touched upon this in the opening remarks. But for us, it's -- we've grown in the past few years from about one million creators to now more than eight million creators. But the opportunity in front of us is really to get to more than 50 million craters. And as part of that, it's really all about getting those audiences of those 50 million potential creators to start listening to that content, becoming super fans, and creating more and more tools for the creators and fans to start engaging with each other, turning that engagement into monetization opportunities and so on. So that's really the kind of main strategy, and a lot of that comes down to a combination of platform improvements, discoverability of just being able to showcase and seeing new content and then, obviously, the content team and onboarding new creators and finding, you know, compelling ways to get creators to feel like Spotify is the number one platform, because when that happens, it is a flywheel that turns into more creators turns into more users and more users turns into more creators and so on and so forth.
Bryan Goldberg: All right. Next question from Mario Lu, can you provide more details on both the strategy and economics of Spotify Open Access? Are partners expected to pay Spotify revenue share of subscriptions, or is the main goal simply to increase engagement on the Spotify app overall?
Daniel Ek: Yes, so, so really the idea between Spotify Open Access is to provide an open platform for a creator, so we want to enable as much audio as possible and we view it as we want to be the audio platform of the world. And we have multiple ways for creators to engage with our platform. One of them is obviously the Open Access, where we don't partake, and take any revenue, and the creator themselves can choose how they best want to monetize their audience or in the case they already had a paid on audience, like Ben Thompson, they can enable that audience to listen, friction free on the Spotify app without sort of any hiccups. And then, to the extent that the creator needs help, and both create, getting more customers to come to them and help in better friction on payment, et cetera. We do also offer that opportunity and those are added revenue opportunities as well. So the better way to think about it is, we're primarily doing it to increase engagement and to draw new users there, but I am 100% confident that that also leads to more business opportunities for Spotify long-term, as we'll have more and more platform tools, whether that be advertising, whether it be payment options that we can offer or even, you know, in the future live rooms, et cetera. We can offer via the platform, I think all of those are exciting new revenue possibilities.
Bryan Goldberg: And next we’ll take Mario as a follow up on this one. With the Green Room soft launch in mid-June, can you explain why you decided to create a separate app for the live audio experience versus embedding it within the core Spotify app?
Daniel Ek: Yes, I mean, the origins of this is an acquisition we did earlier in this year and I'm actually very proud of the team, we pretty much made the acquisition a quarter later, we're able to incorporate it into Spotify, you consistent refresh of the product, stabilize it for a size Spotify sized audience et cetera. That's very much the reason why this is a sort of separate app, and I think you should expect there'll be more and more tie-ins to the main Spotify app too and obviously, we'll leverage our existing distribution on Spotify too, but this feels like a great way to learn, experiment and iterate, much faster than if we had to wait for a full on integration into the main app, given the difference in creator and consumer experience.
Bryan Goldberg: Okay. We've got another question from Ben Swinburne. You called out a revenue mix shift towards podcasts, among other things, benefiting gross margins. Previously you would discuss podcast investments this year as a greater drag versus last year. Has something changed? Is the business now at a scale that it should drive gross margins going forward?
Paul Vogel: Yes. So, a big chunk of that is a couple things. One is revenue exceeded expectations on the podcasting side. You know, led both organically as well as the acquisition of Megaphone and some of the inventory for Jerry and others, which was super impactful. You know, as Daniel mentioned in his opening podcasting, revenue growth was up 627% It was actually up close to 700% on an FX neutral basis. On an organic basis, it was up almost 200%, FX neutral. So the revenue growth there was better than we expected, which led to better margins on that side. On the investment side, I would say, it was in line maybe a little bit lighter than we thought in terms of the quarter, that has more to do with just quarterly I’d say variances with respect to content spend that it does any shift in terms of that overall investment will make for 2021. There's some of the shift got pushed out to the back half of the year, but in general was really led by just the leverage you get on having a more upside on the podcasting revenue side. In terms of how it drives gross margins going forward. I wouldn't necessarily say it's inflection, I'd say it's a – it's a strong indicator of where we can go, when advertising is strong and where we can go with the leverage on the – on the podcasting side over time. We're going to continue to invest in the business. But I'm super pleased with how it performed in the quarter.
Bryan Goldberg: Okay. Next question on Rich Greenfield, also related to podcasting. We sense a shift in your podcast strategy from studio content that's available on all podcast platforms to high profile exclusives like Joe Rogan, Alex Cooper, Dax Shepard, both in the US and around the world. What's changed with your strategy?
Daniel Ek: Hey, Rich, and I believe Happy Birthday, by the way. Yes. I don't think really anything has kind of changed. I think we have been experimenting with windowing. We have been experimenting with exclusives and we've said for quite a long time, that obviously we want more and more of the listening to happen only on Spotify, so it's been kind of a more of a natural evolution to drive it towards that. I do think, again, from a strategy perspective, we are very much, aiming to be a very open platform, all along and the most important job for us is to be, you know, a great partner to all the creators that we have in the ecosystem, so I don't think it rolls out and say that we would only do exclusives hard on I think you're going to see us do many different types of deals but where possible, we would obviously opt to take it fully exclusive, but we're going to be very opportunistic about that going forward.
Bryan Goldberg: All right, next question from Mike Morris, another one on gross margin. What are the factors that drove to 2Q gross margin above guide to the 26.5% result that are not expected to recur or said another way, what are the incremental headwinds anticipated in the second half of the year, given that the high end of third quarter and fourth quarter guidance is below the 26.5%?
Paul Vogel: Yeah, so let me, let me just unpack gross margins in the quarter in general because, so we reported a gross margin of 28.4 and we've talked about sort of more of an adjusted organic number of 26.5. So, the delta between those two was the reversal of some publishing accruals. They were one-time in the quarter. But I will say, if you think about what we had done, we take a very conservative view of how we play publishing globally, where sometimes it's a little bit of a challenge to make sure you're paying people. So we tend to accrue at rates that are even higher and more conservative than we need and as we're able to get comfortable that we're paying the right amounts we reverse those accruals and there's been some work in Europe in particular to get this accomplished in a way that was satisfactory for everybody. We can get into the details offline with the IR team, if you'd like. But so in every quarter for like the last two years, we've actually had about 20, 30 basis points of a hit to gross margin that we haven't necessarily called out, because we were accruing more than we actually potentially might have to pay out to be conservative, we now feel comfortable about the proper payout, so we're able to reverse that accrual, and that was the big 190 basis point gain there. The rest is that's about two-thirds of the upside relative to expectations. The rest of it was a couple of factors; one, I mentioned, which was the better revenue on top of podcasting, which helped. We did benefit on some of the other costs of revenue, a little bit more than we thought, so payment fees, streaming delivery, customer service, those types of things, where we got a little bit better leverage than we thought. So the team has done a really good job on those angles. And so it's really been a combination of the better revenue growth on the one hand, which helped on the margin side, and then also on the other cost of revenue side. In terms of going forward, so now that that accrual has been reversed, that actually gives us a benefit moving forward, it's about $20 million or so a year. So that will help in terms of a positive. And then the negatives are, as I said, there's always some seasonality on the content side, so there'll be potentially more spend on the content in the back half of the year than the front end of the year, and we're not expecting quite the same leverage on some of those other costs of revenue that we saw in Q2.
Bryan Goldberg: All right. Next question from Doug Anmuth. MAUs have been light the last two quarters, and it usually takes 12 to 18 months to convert to a premium sub. Does that slower top of funnel growth create premium sub risk in future periods?
Daniel Ek: Maybe I'll start here and then Paul, you can add. So I think it's really important to contextualize that most of our likeness has really been due to an out-performance in 2020 more than anything else. And even despite all of that, as I said in some of my opening remarks and part of the reason why I feel really good about things, including, of course, all the leading indicators pointing positively is that -- we -- when you look at the last two years, we're still on track of outpacing those average -- the average growth of those past two years, we're still on track of outpacing that in this year. So overall, top line MAU growth is healthy, we're just comparing it to an exceptional 2020 and that's clearly on us. We should have realized some of this variability going into the year, et cetera. But I feel really good about that. And then the second part of that is leading indicators, so looking super healthy, engagement, super strong, podcast engagement super strong. So just overall, plenty of runway left, and we're still early in going from linear radio to on-demand audio. So I feel really good about the sort of future path to one billion plus users when it comes to Spotify.
Paul Vogel: Yeah. And I would just add on top to highlight what Daniel said. If you look at the 2020 and 2021 combined and think about the average growth in MAU, it exceeds any other year we've ever done, and so again, we still feel really good that the overall sort of long-term slope of the growth in users is on track and healthy. And then on top of some of the variability has been in markets where we would expect they would have, you know, higher, free users for a longer period of time. Anyway, there are countries again, like India, where our expectation is you're playing a long game there and while we expect subscriber growth there and we're optimistic, it's going to take a long period of time, so one quarter here or there of growth is really not going to impact the overall trajectory of where we're expecting. So at this point, we don't think that it should impact any of our subscriber expectations for, for any minimum this year and then, you know, we'll talk about next year and we give guidance later on in the year.
Bryan Goldberg: Okay. We got another question from Rich Greenfield, this one on marketplace. Can you help us understand Discovery Mode, walk us through an example of how it's being used and how that leads to 40% more listeners for artists, utilizing it?
Dan Ek: Yeah. So the first way to contextualize Discovery Mode is, it's really a marketing tool for artists and labels. So the great thing here is that it's really a result based marketing tool, where you're really only paying Spotify if you find success, hence why we're highlighting the success from Discovery Mode here. So it's really a marketing tool where you opt in, you choose the program. You do see the downstream implications of how many more listeners were able to generate because of this, how many more downstream, followers and subscriptions am I able to generate, and labels that are in this beta are now very, very active on it and we're seeing a very healthy, sort of retaining rates of new bookings through the tool as well and we're just looking at making that easier and smoother in this beta period, and hopefully that will lead to even better results, which of course means even better adoption.
Bryan Goldberg: Okay. Next question comes from Steven Cahall. How should we think about your ARPU trajectory on a constant currency basis as you move through price increases, should we expect our poor to expand from here? Are there any plans for a base price increase, excluding family or duo. And then finally, are there any notable churn impacts from price increases?
Paul Vogel: Yes, so I think I answered the first two already, so gross intake churn right on plan, if not slightly better in markets where we've changed prices. In terms of thinking about ARPU, yes, so we were up in Q2 on an FX neutral basis very, very modestly but we were up it's the first quarter I think in three, four years as far back as I looked, where we had positive ARPUs it as a great trend. We do expect ARPU on an FX neutral basis to be positive in the back half of the year. That is a combination of the follow through, the flow through of the price increases, somewhat offset by some of the pressure we get from product mix and geographic mix but in general we do see ARPU being up modestly for the back half of the year, again on – I am sorry, on FX neutral basis.
Bryan Goldberg: Okay. Next question from Matt Thornton, can you talk about what inning you're in with your marketplace strategy overall, the momentum and artists label publisher feedback around sponsor recommendations and Discovery Mode, and how much of an opportunity or focus is live?
Dan Ek: Yes. So, as a European, I'll try to do my best imitation of what inning, is what, but if I'd make an educated guess I would say we're probably in the second or third inning, I have no idea but that should indicate early in the journey but like not starting. So it's still much, very much early days. We're past the point of launching this. We're getting results. We're seeing very, very strong sort of leading indicators around both results that partners that are participating in these programs are giving us -- and the feedback around how we should develop this even further. A lot of this just comes down to a lot of details around how labels and artists work together and understanding that and building out products that are bespoke to that. And to an extent, that's probably one of the biggest surprises for us is just how much data sharing between labels and agents and managers and building out almost like an enterprise suite for products where you have certain types of rights for certain types of people on the artist team, certain types of dashboards that should only be available for other types of teams. So a lot of that stuff is stuff that we've now been building out over these past few quarters. And that's certainly like new, and that's what happens in the customer development phases. You're actively going in and learning more about the customer needs and understanding that. But the good news is, usually, when you're past that, you have a product that's highly tailored, highly bespoke to that type of audience. And I feel really, really good about the feedback that I'm seeing. Of course, as with anything that goes with our music partners, there's always a lot of controversy around almost anything we do at this point just because of the size we are for the industry, and how much of an impact any single change that we do. So even shifts in how our algorithms work, massively impact almost all marketing teams on labels and artists, too. So we get a lot of feedback on even those types of changes, too. But I think that's just more of a natural evolution as goes to just the scale and the size of Spotify and how important we are for the music industry. And then live, again, I talk about this, but I think the most important thing really is we're very, very creator focused. And so live, if you think about music creators, it is today a vast majority of all the income that normally flows through to an artist. So to the extent that Spotify can be helpful in driving live outcomes, that's going to materially improve the earnings of an artist and that obviously means that we can be an even more better partner to artists that can then drive preferences and get artists engaged even more on the Spotify platform. So it's a long-term, very important focus of ours to the extent that it will have an impact on the business side, that's not how we work. What we're doing really is we're focusing on the needs for the constituents and building amazing experiences. And, thereafter, we tend to focus on how do we monetize that, too. So I just wanted to be clear upfront about that, that you should expect us to try to build amazing products that will get drive meaningful outcomes for our partners, and it's only at that point that it starts flowing through to business outcomes for Spotify too.
Paul Vogel: And I would just add two things. One, just dovetailing what Daniel said, everything about that is 100%, but it did actually impact gross margins, and I should have said that in my earlier comments. So there was a slight benefit that slightly a decent benefit to the gross margin out-performance. So I mentioned the better revenue, and I mentioned the other cost of revenue, marketplace was also another driver of improved gross margins in the quarter, and I should have mentioned that earlier. And then the second point is for those of you non-Americans on the call, that's about the 15th minute of a football game in terms of translating innings into football games.
Daniel Ek: Great. Now I understand you. I like to use football too, by the way, I didn't call it soccer. So, appreciated.
Bryan Goldberg: Okay. Next question comes from Doug Emmis, related to podcasting. How would you characterize the early returns on the Spotify Audience Network, the Open Access platform and streaming ad insertion? And what are the next steps to boost their utilization and monetization?
Dan Ek: Yes. So I think the early returns has been a great creator excitement, which usually translates to adoption. Some of these are more mature than others. So OEP, very early days, still building it out, rolling it out, great excitement among partners. SAI and SPAN, obviously, already are live today and even in the quarter, started impacting the results that we're seeing. But for me, the most important thing, again, comes down to focus on our constituents that we're serving providing great tools for them. When that happens, that then leads to better outcomes for Spotify. And maybe if I zoom out and just kind of give some context, I think really, the big thing you all as analysts should focus on is the shift of Spotify as a premium subscription music service to an audio platform. And that audio platform means that the business model fundamentally of Spotify now is very different than what it had been in the past. And you're starting to see that shift come through ads. But I suspect over time, there'll be many more tools and services that we are driving and delivering here that will then all start impacting the overall results in different ways of the business going forward. And so when I in my opening remarks, focused on that sort of shift on velocity for product improvements and platform improvements, that is, for me, perhaps one of the most important leading indicators for me about sort of having that kind of impact, both for creators and consumers that then leads to tangible benefits. But you should really expect us to be more investing in the platform side of Spotify, which will then lead to lots and lots of really exciting business outcomes for Spotify in the future too.
Paul Vogel: And then just I'll go – Daniel at macro, a little micro here. If you look about sort of span in SAI, in particular, in terms of ad products in the quarter, as we mentioned, we had a really strong advertising quarter numbers, albeit expectations. We've seen through the implementation of some products that sell-through rate was better than expected in the quarter and CPMs were also a little bit better than expected in the quarter. So we saw better utilization as well as better CPMs in the quarter.
Bryan Goldberg: All right. We've got the next question from Hamilton Faber. Could you comment on recent press reports that Spotify is interested in becoming involved in live events? How easy would it be to scale in this space?
Dan Ek: Yes. And maybe by way of context, we've actually sort of depending on how you view had been involved in the live space now for many, many years, both having as a feature the ability for artists to post upcoming concerts on the – on their Spotify pages. But then subsequently, with our own playlist and brands like RapCaviar been doing some shows with tens of thousands of people in attendance and having that all over the US and UK and so on. So we've been in this space for quite some time. Now I can't really comment on sort of product tests that we're doing. But as I mentioned in my previous comment, Live is a meaningful thing for many of our creators and it's something that we're excited about. And in the past quarter, as evident by some of the tests we did, we did some live concerts, digital live concerts and tested that and saw some really positive results from that and lots of excitement from our artist partners about Spotify helping out during COVID, and providing more meaningful ways for them to monetize their fan base. And I think that's in line with our strategy. To the extent that live will have an even bigger impact, I think we're still an open platform. We want to work with as many partners as we can and provide as many opportunities for creators to create more ways to turn a listener into fans and turn fans into super fans and increase the monetization for those creators.
Bryan Goldberg: All right. Next question comes from Deepak, and it's directed to Paul. Can you provide additional color on some of your assumptions in the second half outlook or guidance? You've renewed several promotional programs, but also have new ones such as TikTok. How are you thinking about contribution from these new programs, particularly as you potentially expand them into more markets?
Paul Vogel: Yeah. I mean, it's hard to talk about any one plan, because we don't really do that. I would say, in general, we're excited about a number of new partnerships we have. They are all baked into our forecast moving forward. Obviously, the newer ones are sometimes tougher to forecast, because they are new and we don't have a track record or history in terms of success. I would say in addition to the partnerships, which we're excited about, there'll be higher marketing expense in the second half of the year as well because we pulled back on some of that. So I think that's all factored into the guidance as well as kind of the trend lines we saw coming out of Q2 relative to the first half of Q2. So that's all within the numbers with the obvious caveat that there's still a lot going on. There's still a lot of variability in a number of markets with respect to -- due to COVID. So we are forecasting and monitoring as best we can.
Bryan Goldberg: All right. Next question is from Mark Mahaney, also somewhat guidance related. What are the -- can you provide on the two-sided marketplace and your view on when these initiatives will become financially material to the company?
Paul Vogel: Yes. So I think I said earlier, we are starting to see a benefit of the two-sided marketplace. It did have a positive impact on gross margin in the quarter. To Daniel's point, we're going to continue to launch out tools and services and products that help creators and artists and labels enable in order for them to maximize their careers and their monetization. And so we feel good about it. I think a couple -- a while ago, we gave some numbers on marketplace and where it's going. I would say we've met or exceeded all of the expectations we had in terms of the marketplace impact on gross margins.
Bryan Goldberg: Great. Next question is from Jessica Reif Ehrlich. Is the advertising strength you're seeing right now solely from the U.S., in addition to a healthy ad market, how is Spotify audience network contribute to the growth? And should we anticipate faster growth as you roll out to additional geographies?
Paul Vogel: So the US is our largest market when it comes to advertising. That's probably not surprising, and it did outperform. But all of our markets actually outperformed. So we had great growth in markets outside the US. And so as the US goes, the advertising market for us will go because it is the largest part, but every segment we had, every geography outperformed their expectations, which is great. Spotify work definitely helped to contribute to growth. I think as I mentioned a little earlier, sell-through rates were better than expected. CPMs are a little higher than expected as well. So we're seeing the benefit of what we created in bringing the Megaphone inventory into the Spotify family, which has been great. And geographies – more geographies will help. As I said, the US is still predominant in terms of advertising in Europe is a pretty big second and everything else is pretty small after that. So I would say for the near-term, it's really a US Europe story. Over time, more of those geographies will contribute.
Dan Ek: Maybe just as an addition here, we've talked a little bit about this before, but I'll say it again. We're mostly supply constrained and of demand constraint, meaning it's really more about us opening up more inventory than there being a lack of interest from advertisers in advertising with us. So the really big effort for us at the moment is just how do we unlock even more supply for all the demand that we have.
Bryan Goldberg: All right. We've got time for one or two more questions. The next one is going to come from Doug Anmuth, regarding podcasting. O&E content is a small percentage of overall podcast on the platform, but it accounts for approximately 20% of total consumption. How do you think about the optimal mix of O&E content going forward?
Dan Ek: I don't think we have a particular number that we're striving towards. What we can see is that the O&E part of this tends to drive a bigger bump in engagement and in particular, translates into more new users. So whenever we've done an exclusive, we've tended to be able to convert more of the existing Spotify audience to also start listening to podcast on Spotify. And likewise, we've been able to get more people from outside of Spotify to try Spotify for the first time. So it's definitely been positive. But as the mix goes, we're primarily focused on making Spotify the audio platform on the Internet. And we think that is the most important thing, and that's opening up more content. And as I mentioned, going from 8 million creators to 50 million creators is the primary focus. But obviously, the O&E part is a very helpful addition and it's helpful not just with our ability to get more people to listen to podcast, but also is a very attractive proposition for advertisers, as I think was evident in the quarter.
Bryan Goldberg: All right. Thanks for the question, Doug. And actually, we are out of time for Q&A. So I'll turn it back over to Daniel for closing remarks.
Daniel Ek: All right. Well, thank you so much for listening to this Q&A portion. And of course, MAU growth slowed during the significant COVID-related pull-forward. We saw in 2020 and the impact of the uneven recovery in the first half of 2021. But we do anticipate a strong second half and our trend lines are looking very healthy. And of course, in the short term, some COVID uncertainty lingers and in the long term, the shift from linear to on-demand audio will only continue to accelerate and has more than 1 billion user opportunities left, I think it really reinforces our position as the audio browser of the world. And no one else is as laser focused as we are in audio. It's all we've done for over 15 years, and that dedication is an advantage we leverage every day for creators, for fans and brand partners. We're pushing ourselves to deliver at an unprecedented pace, and we're building out the infrastructure to go even further faster. And long term, I believe these product innovations will bolster MAU and subscriber growth helping to track more and more users around the world and connecting them to creators they already love as well as the ones they are waiting to discover. I'll be talking more about the quarter on our podcast Spotify for the record, which will go live on our platform tomorrow. Thanks again, everyone, for joining us.
Bryan Goldberg: Okay. And that concludes today's call. A replay of the call will be available on our website and also on the Spotify app, under Spotify earnings call replays. Thanks, everyone, for joining.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
Related Analysis
Spotify Shares Surge 13% on Better-than-Expected Q2 Earnings and Gross Margin
Spotify (NYSE:SPOT) saw a notable increase of over 13% in its stock price during pre-market today after reporting better-than-anticipated earnings and gross margin for Q2/24.
The streaming giant posted an EPS of €1.33, surpassing the Street forecast of €1.05. However, revenue for the quarter was slightly below expectations, coming in at €3.81 billion compared to the estimated €3.82 billion. Premium revenue was recorded at €3.35 billion, marginally above the €3.34 billion estimate.
The company’s gross margin for the second quarter stood at 29.2%, exceeding the Street estimate of 28.1%.
Monthly active users (MAUs) were reported at 626 million, falling short of the projected 631.46 million. Similarly, ad-supported MAUs were 393 million, below the expected 397.71 million.
For the third quarter of 2024, Spotify forecasts revenue of €4 billion, which is significantly lower than the Street estimate of €4.365 billion.
KeyBanc Maintains Overweight Rating on Spotify, Expects Bundles to Boost Profits
KeyBanc analysts reiterated an Overweight rating and a $400 price target on Spotify (NYSE:SPOT) stock, highlighting the potential for Spotify's bundles to significantly boost operating profit starting in the third quarter.
The analysts noted that while the key determinant will be the bundle take rates, Spotify will have limited data by the time of its second-quarter earnings report. According to the analysts' calculations, if 50% of subscribers in Australia, the U.K., and the U.S. opt for the bundle, it could result in a 6-12% increase to his above-consensus operating profit forecast for Q3/24.
Overall, the analysts believe that bundles enhance lifetime value (LTV), which should give Spotify the flexibility to invest in growth while also improving profit margins.
Spotify’s Price Target Boosted at Citi
Citi analysts increased their price target for Spotify (NYSE:SPOT) to $310 from $255 while maintaining their Neutral rating on the stock. The analysts noted that Spotify's stock has performed well as investors respond positively to cost controls, welcome price increases, and show growing interest in emerging opportunities such as audiobooks, video ads, and education.
While the analysts believe the Street has underestimated Spotify's revenue for 2024, they suggest that the forecasts for 2025 and 2026 may be overly optimistic. The primary discrepancy between their projections and the Street's lies in the expected moderation of premium net additions.
Spotify Stock Surges 14% Following Strong Q1 Results
Shares of Spotify (NYSE:SPOT) soared over 14% intra-day today following the audio streaming giant's announcement of fiscal Q1/24 results that exceeded expectations for earnings, revenue, and gross margins.
Spotify disclosed earnings per share of EUR 0.97, surpassing the anticipated EUR 0.64. The company's revenue reached EUR 3.64 billion for the quarter, edging above the forecasted EUR 3.61 billion. Premium revenue alone amounted to EUR 3.25 billion, ahead of the expected EUR 3.22 billion.
In user metrics, Spotify's monthly active users (MAUs) totaled 615 million, slightly below the predicted 617.89 million. Premium subscribers reached 239 million, narrowly missing the forecast of 239.26 million. Spotify particularly excelled with a gross margin of 27.6%, outperforming the expected 26.5%.
For the upcoming second quarter, Spotify projects revenue of EUR 3.8 billion, slightly trailing the consensus estimate of EUR 3.85 billion. The company anticipates MAUs to rise to 631 million and premium subscribers to increase to 245 million, both figures slightly below expectations.
Additionally, Spotify forecasts a second-quarter gross margin of 28.1%, surpassing analyst expectations of 26.7%.
Spotify's Price Target Raised to $400 by Pivotal Research
Spotify's Price Target Raised by Pivotal Research
On April 23, 2024, Jeffrey Wlodarczak of Pivotal Research significantly raised the stakes for Spotify (SPOT:NYSE) by setting a new price target of $400, up from its then-current price of $305.56. This bold move, as reported by StreetInsider, suggests a strong belief in Spotify's growth potential, forecasting an impressive upside of nearly 31%. This optimistic outlook is not unfounded, as Spotify has recently demonstrated remarkable financial performance, including a record-breaking quarter that has caught the attention of investors and analysts alike.
Spotify's financial achievements have been nothing short of spectacular, with the company reporting a surge in its stock price by 15% to $314.12, following the announcement of its first-quarter earnings. This increase is a testament to the company's robust financial health and its ability to exceed market expectations. Specifically, Spotify announced earnings of $0.97 per share, significantly outperforming the anticipated $0.65 by analysts. This performance is a clear indicator of Spotify's successful cost-cutting measures and its strategic focus on profitability, which has led to record profits and sales figures surpassing Wall Street forecasts.
The company's journey to this point has been marked by strategic adjustments and resilience in the face of challenges. After a year of scrutiny from activist investors and implementing deep layoffs as part of its cost-cutting efforts, Spotify has emerged stronger. Its ability to post a record quarterly profit, as highlighted by CNBC, underscores the effectiveness of its strategic decisions and operational efficiencies. This turnaround is further evidenced by the company's earnings per share of $1.05, a significant recovery from a loss of $1.24 per share a year ago, as reported by Zacks Investment Research.
Moreover, Spotify's stock performance on the NYSE has been impressive, with the price reaching a new year-high of $315.78, up from a year-low of $128.67. This volatility range demonstrates the market's growing confidence in Spotify's business model and its future growth prospects. With a market capitalization of approximately $60.98 billion and a trading volume of 4.92 million shares, Spotify stands as a formidable player in the technology and music streaming industry.
The combination of Spotify's strategic cost-cutting measures, its ability to surpass earnings and revenue expectations, and the positive sentiment from analysts like Jeffrey Wlodarczak of Pivotal Research, all contribute to a bullish outlook for the company. As Spotify continues to navigate the competitive landscape of music streaming, its recent financial performance and strategic initiatives position it well for future growth and profitability.
Spotify’s Price Target Raised at JPMorgan Ahead of Earnings
JPMorgan analysts increased their price target on Spotify (NYSE:SPOT) to $320 from $280 while maintaining an Overweight rating. The analysts are optimistic about Spotify's performance going into the first quarter earnings, expecting the company to accelerate revenue growth, expand gross and operating margins, and significantly boost free cash flow in 2024.
Spotify started the year on a strong note with growth in users and subscribers, leading to a forecast of 82 million net adds for monthly active users and 27 million for premium subscribers in 2024. With podcasts gross margins nearing breakeven and anticipated to turn positive in 2024 due to ad revenue growth and content optimization, Spotify is expected to see gross margin expansion. This, coupled with ramping Marketplace contributions, other revenue cost leverage, and strong ad revenue growth, is anticipated to drive improvements in operating and net income, along with significant free cash flow growth in 2024.
Ahead of first-quarter earnings, scheduled for April 23, JPMorgan slightly adjusted the forecasts for monthly active users and premium subscribers to be about 1 million above Spotify's guidance, with expected counts of 619 million and 240 million, respectively. The 2024 revenue growth projection stands at +17% year-over-year on a constant currency basis, balanced across subscriber growth and average revenue per user increase.
Spotify Shares Surge 9% on Job Cut Announcement
Spotify (NYSE:SPOT) experienced a more than 9% increase in its share price intra-day today following the announcement of a significant workforce reduction. CEO Daniel Ek, in a post on the company's website, described this move as a pivotal change for Spotify. He announced that around 17% of the total workforce would be cut to align the company with its future objectives and to manage operational costs effectively.
Ek noted that initially, Spotify had considered smaller workforce reductions spread over 2024 and 2025. However, the substantial gap between the company's financial targets and its current spending necessitated a more decisive action. This step is viewed as crucial for achieving the company's goals.
In its financial update back in October, Spotify reported an 11% increase in third-quarter revenue compared to the previous year, reaching 3.36 billion euros. The company had projected a revenue of 3.7 billion euros for the fourth quarter.
However, with the recent announcement of major job cuts, Spotify now expects to incur a loss of between 93 million and 107 million euros in the fourth quarter, a stark contrast to the previously anticipated profit of 37 million euros. This revised outlook includes charges of approximately 130 to 145 million euros, attributed to severance payments and impairment of real estate assets. These charges are expected to be primarily paid out during the first and second fiscal quarters of 2024.