Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Spotify Technology SA (SPOT, Financial) reported its highest free cash flow quarter ever, marking three consecutive quarters of profitability.
- The company expanded its gross margin and beat its subscriber forecast by adding 7 million net new subscribers.
- Spotify Technology SA (SPOT) successfully implemented price increases in several key markets, including the US, with lower churn rates than previous increases.
- The company introduced new subscription plans, offering more listening choices and successfully attracting different consumer segments.
- Spotify Technology SA (SPOT) saw strong engagement and growth in its podcast and audiobook offerings, contributing to overall platform engagement.
Negative Points
- Monthly Active Users (MAU) growth was below expectations, particularly in developing markets where user acquisition and engagement are more challenging.
- Advertising growth decelerated, with the company noting volatility in upper funnel brand-related campaigns.
- The company faces challenges in achieving high ROI from marketing spend in developing markets, impacting user acquisition strategies.
- There are ongoing legal and relationship complexities with music labels and publishers, which could impact future negotiations and cost structures.
- Despite price increases, there is a risk of churn and the need to closely monitor consumer reactions to further price adjustments.
Q & A Highlights
Q: As you evaluate the factors weighing on MAU growth, do you believe it's more a byproduct of expense reductions or simply being more penetrated in your end markets? What actions you're taking to drive more MAU growth?
A: Daniel Ek, CEO: It's definitely not an impact on TAM. We still believe there's plenty of room left to grow, especially in developing markets. The key constraint is ensuring marketing spend meets ROI expectations. We're focusing on improving marketing channels, optimizing acquisition in developing markets, and enhancing our product to boost engagement and retention.
Q: Can you talk about the drivers of improved music and podcast profitability leading to better gross margin? How should we think about royalty savings related to bundling dropping down to the bottom line versus being invested in other areas?
A: Ben Kung, Interim CFO: The sequential improvement path has been fueled by improvements in music, including marketplace growth, and podcast profitability. We are confident in our position regarding bundling treatments, though we won't comment on the specifics of our deals.
Q: Now that major podcasters are largely non-exclusive, how has podcast engagement changed on Spotify? As more of the industry shifts to video podcast, how do you attract more creators and grow engagement versus a platform like YouTube?
A: Daniel Ek, CEO: Podcast engagement remains healthy, and video podcasts show even higher engagement. We attract creators by offering a platform that supports multiple formats, leveraging our existing user base, and providing better monetization opportunities.
Q: Advertising growth is decelerating. Given the large base of MAUs and increasing engagement, why is advertising not growing dramatically faster? How does it ever get to the 20% of revenues as Daniel had hoped?
A: Daniel Ek, CEO: Our subscription business is performing better than expected, which impacts advertising potential. We are investing in programmatic and automated buying to diversify and create agility in our ads business. Ben Kung, Interim CFO: Our ads business is currently direct sales and enterprise heavy, focusing on upper funnel brand-related campaigns, which are volatile. We see opportunities in programmatic and tapping into new demand pools.
Q: Can you provide an update on your relationship with the labels against the backdrop of legal action taken by the MLC? Can you also clarify accounting for the lowered CRB rates?
A: Daniel Ek, CEO: We view our relationship with labels as a win-win, with increasing payouts year over year. Ben Kung, Interim CFO: We are confident in our position regarding the MLC and CRB rates but won't comment on specific accounting details.
Q: While it's still early in rolling out, can you talk about initial consumer reaction/churn related to the recent US price increase, the second in a year? How do you think about the cadence of price increases going forward? And should we expect more raises across international markets this year?
A: Ben Kung, Interim CFO: We are encouraged by the initial response to price increases, with better-than-expected cancellation rates. We are monitoring the situation closely but do not have specific forward-looking plans to share.
Q: Daniel, you outlined back at the 2022 Investor Day how Spotify is focused on lifetime value. As gross margin expands and lifetime value increases, how does this influence where you invest for future growth in both the core music business and emerging areas like audiobooks and education?
A: Daniel Ek, CEO: We focus on solving problems at the intersection of creators and consumers, looking for win-win opportunities. Investments are made in areas that enhance engagement and monetization, such as concerts and new content verticals like audiobooks and education.
Q: There are many moving pieces across bundling price increases and plan or tier optimizations. How will this impact currency-neutral ARPU growth through the second half of the year and into 2025? What is the right balance of volume and pricing to achieve a 20%-plus revenue growth rate over the next one to three years as laid out as a goal at the Investor Day?
A: Ben Kung, Interim CFO: The most important factor is continued growth in engagement on our premium and subscription offerings. We will lean into different parts of the revenue equation at different times, leveraging our portfolio for flexibility and optionality.
Q: There has been increasing noise that an ultra premium tier is coming that would cost an additional $5 or more above your current premium tier. Can you help us understand what the consumer would be getting and how you determine what features should be in this new offering?
A: Daniel Ek, CEO: We are considering a deluxe version of Spotify at around $17-$18, offering higher quality and more control. This is driven by consumer demand and aims to create a win-win for both the music industry and our subscribers.
Q: How have subscribers responded to the premium plan price increases? Can you share detail on how many have churned and how many have opted for the basic plan relative to how many have retained premium service? Have you seen any difference by market?
A: Ben Kung, Interim CFO: Early days suggest encouraging signals with better-than-expected cancellation rates. Having the basic plan helps mitigate churn, but we do not have specific numbers to share at this time.
Q: How does the audiobooks business impact your cost structure? What is the basis for cost recognition? What is the current gross margin on audiobook revenue look like relative to your Investor Day goal of 40%? And is that still the right margin, and what's the timeframe to reach that target?
A: Ben Kung, Interim CFO: Audiobooks follow a variable consumption-based cost structure. It's early days, and we are focused on driving incremental engagement. We feel good about our long-term margin goals for audiobooks as laid out at Investor Day.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
