Spotify Technology S.A. (SPOT) on Q1 2022 Results - Earnings Call Transcript
Operator: Good morning. My name is Julian and I will be your conference operator today. At this time, I would like to welcome everyone to Spotify’s Q1 2022 Earnings Conference Call and Webcast. Bryan Goldberg, Head of Investor Relations, you may begin your conference. Bryan Goldberg: Thanks, operator and welcome to Spotify’s first quarter 2022 earnings conference call. Joining us today will be Daniel Ek, our CEO and Paul Vogel, our CFO. We will start with opening comments from Daniel and Paul, and afterwards, we will be happy to answer your questions. Questions can be submitted by going to Slido.com and using the code #Spotify Earnings Q1 ‘22. 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 to limit yourself to one to two questions and to the extent, you have got follow-ups, we will 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 questions. Before we begin, let me quickly cover the Safe Harbor. During this call, we will be making certain forward-looking statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed on today’s call, in our letter to shareholders and in filings with the Securities and Exchange Commission. During this call, we will also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our letter to shareholders, in the financial section of our Investor Relations website and also furnished today on Form 6-K. And with that, I will turn it over to Daniel. Daniel Ek: Alright. Hi, everyone and thank you so much for joining us. So, I will kickoff by sharing a few of the highlights you may have seen in our shareholder letter. We delivered another strong quarter in Q1. And when you exclude the impact of our withdrawal from Russia, we came in line or ahead on every metric. And this performance builds on the momentum we saw in Q3 and Q4 of 2021 and I am very pleased with the continued acceleration we are seeing in user growth headed into Q2. There are puts and calls in every quarter and this one was no exception. As I have said several times before, Q1 traditionally sees lower new user activations, but despite this, we delivered solid results. And I think this is a testament of our consistency of execution and clearly shows just how compelling our offering remains for creators, users and advertisers, even in the face of uncertainty provoked by world events. So, it’s safe to say that my overall confidence in the business continues to grow on all fronts. Case in point is the strength of our music business, evidenced by the recent release of new royalty data on our loud and clear websites. The data clearly outlines the role Spotify and streaming are playing in growing the entire music ecosystem. Not only is streaming driving record revenues in the music industry, but there are more artists sharing in that success than ever before. In fact, the worldwide growth is truly staggering as more artists hit milestones across all revenue levels. So for the first time, over 1,000 artists generated over $1 million and over 50,000 artists generated more than $10,000 on Spotify alone. For those who are interested in learning more, I would encourage you to check out the loud and clear website. So, our core business remains incredibly strong. And this strength is built on the investments we continue to make in constantly enhancing our platform, which in turn elevates the experience for users and creators. We are especially investing in our core platform capabilities. These are multiyear investments to enable a constant iteration across our products, tools and services. And given the positive results we are seeing, you should expect this to continue for the foreseeable future. And I recognize that many of you want more clarity around when the benefits of all these investments will be realized, including when they will show up in our financial statements. And this is something we will unpack for you at our upcoming Investor Day. But to give you a sense of the breadth and the impact of our investments are already having for creators, users and advertisers, allow me to offer a few examples of things we shipped this quarter. So, take our ads business, which continues to be a strong revenue driver, thanks to the investments we are making to modernize audio advertising, the recent third-party survey validate this belief showing that Spotify is the must buy audio ad partner in the U.S., and we are delivering more impact for advertisers and publishers through our acquisitions like Podsites and Chartable and we are already seeing the impact these moves are high on renewal rates and deal sizes. And these moves will bring important innovation to the marketplace and accelerate our ability to unlock significant revenue growth in both music and podcasts. At Spotify, we are constantly testing and experimenting. And in Q1 alone, we ran almost 2,000 experiments, which is a 5% increase over the previous quarter. Some of those experiments led to full global product launches like the new updates and campaigns we rolled out for Blend, which drove 17x more new user registration than even our annual rap campaign. And in the first 20 days of the Blend campaign, we had 22 million users create Blend playlists. And we are also seeing incredible user engagement worldwide with over 60% of streams coming from Gen Z listeners on Blend. And these results are exactly the types of outcomes we aim to drive and we will continue to aggressively experiment with further user improvements. And our podcast business also continues to surpass even our own high expectations, with podcast share of overall consumption hours reaching another all-time record last quarter. And we now have more than 4 million podcasts on our platform, up 53% year-over-year and up from 3.6 million last quarter, with emerging markets like Latin America and Asia driving a lot of this growth. And with more than 1,150 original and exclusive shows on our platform, overall podcast consumption is strong and increasingly sticky especially as we innovate with features like video, which more and more creators are taking advantage of as they seek to reach new global audiences and connect and interact with their fans in new ways. And with that, I will hand it over to Paul to go a little bit deeper into the numbers and then Bryan will open it for Q&A. Paul Vogel: Great. Thanks, Daniel and thanks everyone for joining us. While Daniel touched on most of our key KPIs, I want to add a bit of color on our operating performance, which was ahead of plan, excluding the wind down of our Russian business, which started in March. Please note, Russia represented approximately 1% of our total MAU and subscribers and less than 1% of our revenues at the start of Q1. Let me first start with MAU. On a reported basis, our total MAU grew to 422 million in Q1. It’s important to note that MAU did see an estimated 3 million benefit from a brief service outage that logged users out of Spotify causing a portion of affected users to create new accounts to log back in. This had the effect of double counting these users in the month of March. We saw this reverse in April as we cycled the 1 month anniversary of the outage. With that in mind, normalized MAU was approximately 490 million in the quarter, still roughly 1 million ahead of plan. Our strength was led by strong results in Latin America and Rest of World led by Indonesia, Brazil and Mexico. On the Premium front, we reached 182 million subscribers in Q1. As we shared in early March, our exit from Russia led to 1.5 million disconnects in that market. Adjusting for that impact, net subscriber growth finished ahead of plan and was aided by outperformance in Latin America and Europe. We also continue to grow ARPU nicely in the quarter, which was up 6% year-on-year and 3% on a constant currency basis. Revenue finished slightly ahead of guidance. We had a really great strength in advertising in the quarter at 30% growth. However, it’s important to note we are trending closer to mid-30% growth prior to Russia’s invasion of Ukraine. With respect to gross margins, Q1 finished modestly above plan at 25.2%. The modest fee was a few small differences versus our forecast, but nothing material to call out. Additionally, our core margins continue to improve while we invest aggressively against new initiatives. Looking to the second quarter, we expect the remaining wind down of our Russia business to reduce Q2 MAU by an incremental 5 million and subscribers by another 600,000. Regardless, we are very encouraged by the trends we are seeing across the rest of the business. And on a like-for-like basis, we see very healthy gains in Q2. Excluding Russia and the MAU benefit caused by the March service outage referenced earlier, our guidance for 428 million MAU implies an increase of approximately 14 million net MAU, a healthy uptick in organic growth versus the 9 million we reported last year and 13 million in Q2 2020. We continue to see promising growth in our largest developed markets, an ongoing rebound in developing markets like India and increased traction in our 2021 market launches. Our Q2 subscriber guidance of 187 million implies net adds of 6 million ex-Russia and reflects the benefit from our global campaign later in the quarter. Lastly, our outlook for Q2 gross margin of 25.2% reflects our expectations for continued core operating improvement across our music and podcasting businesses offset by select growth initiatives. As a reminder Q2 2021, gross margins had a one-time benefit of roughly 200 basis points due to the release of accruals for prior period publishing royalty estimates. As discussed on the Q4 earnings call, we continue to see a number of opportunities for investment. In light of the positive results we are seeing and the attractive long-term potential of these investments, we will continue to pursue many of these initiatives this calendar year. As a result, we expect to keep gross margins around Q1 levels throughout the balance of 2022. And while we aren’t providing guidance beyond Q2, our current expectations for next year would be a continued upward momentum in our core business and a smaller drag from new investments. Finally, I want to conclude with an update on our upcoming Investor Day. We look forward to updating you on the progress we have made since our direct listing, sharing details about our roadmap and providing clarity on the financial progress that we expect over the intermediate and longer term. We are still finalizing plans for the Investor Day, so stay tuned for more information about timing, speakers and everything else to come. And with that, I will turn it back over to Bryan for Q&A. A - Bryan Goldberg: Alright. Thanks, Paul. And again, if you have got any questions, please go to slido.com #Spotify Earnings Q1 ‘22. Once your question is entered, you can edit or withdraw it by selecting the option in the bottom right and we will be reading the questions in the order they appear in the queue with respect to how people vote up their preference for questions. And our first question today is going to come from Mario Lu and it’s on the current operating environment in streaming. Last week, Netflix mentioned market saturation and competition is two main factors for its slowed growth. Are these similar concerns for Spotify? Daniel Ek: Yes. Thank you for joining the call, everyone, and I look forward to sharing more at our upcoming Investor Day that we talked about. And in the meantime, we will share more about the quarter on our For The Record podcast. So, I really hope you guys will tune in. Thank you so much. 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.
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.
