Spotify:Quarterly Results/2024 Q2

Earnings Call Summary

CEO Daniek EK said they are seeing less churn in the current pricing increase rollout than they saw in the previous one.
Daniel EK said in U.S access to audiobooks and podcasts would cost a user $26 which is significantly more than a Spotify subscription.
Daniel EK said the high engagement in developed markets give them tremendous confidence in their ability to raise prices further.
CFO Ben Kung said their recent price changes and product mix contributed to premium ARPU growth by 300 basis points to 10% y/y on a neutral currency basis.
CFO Ben Kung pointed out that their price increase in Q3 will have minimal impact on growth (as seen in historical data).
CFO Ben Kung said they expect ARPU to grow sequentially by 100 to 200 basis points in Q3, a slight moderation compared to Q2 as they start lapping last year's price increase.
EK signaled in the Q&A that a plan that costs around $5 more than the current premium plan is coming. "The plan here is to offer a much better version of Spotify, so think something that could be something like $5 above the current premium tier, like you include, so it’s probably around a $17 or $18 price point, but sort of a deluxe version of Spotify that has all of the benefits that the normal Spotify version has but a lot more control, a lot higher quality across the board, and some other things that I’m not ready to talk about just yet," he said. "We’re quite excited about it, but it’s early days."

Daniel EK said that their paid subscription is anchored in developed markets and its growth depends on net subscriber additions and strategic pricing. On the other hand, growth in ad-supported segment is focused on developing markets where they see an opportunity to convert these subscribers to paid ones but on a longer-time horizon.
Daniel EK said while they already have strong penetration and broad awareness in developed markets, they are not seeing any signs of slowing down, even from historically high levels.
Daniel EK said they have potential to attract a significant number of users in developing markets but these users are quite inconsistent.
Daniel EK said they are seeing healthy engagement trends year-over-year.
Daniel EK said unlike in the past, they are now less dependent on free users to fuel revenue growth in the short-term to medium-term due to bifurcation between developed and developing markets and the increased number of tiers.
In developed markets, many buyers are subscribing to the paid tier without any trial, Daniel EK said.

CFO Ben Kung said the gross margin growth in Q2 was driven mostly by music content cost favorability in marketplace. Kung said in the Q&A that they can't comment on the specifics of their deals.
Kung said reduction in cloud and streaming delivery spend contributed to improvement in gross margin and podcast profitability.
In the Q&A, EK said he cannot comment on the ongoing legal action taken by MLC after Spotify reduced payment made to songwriters.
Kung said in the Q&A that they are confident in their position with regards to the MLC suit. "Look, all I’ll say here is that it’s quite a complex matter that we’ve spent a lot of time scrutinizing, and where we net out has been and continues to be that we’re confident in our position," he said.
Analyst Doug Anmuth pointed out that Spotify said in the investor day (2022) that it targets to grow revenue by 20% in the next one to three years.
Another thing that is boosting gross margin is how they are optimizing the payment fees and traffic costs with their payment service partners.
Daniel EK said in the Q&A that they still target 35% gross margin over the long-term. "That is still very much top of mind for myself and the team," he said.

Daniel EK said there are products that they will launch in the coming months in certain markets which will boost product engagement leading to improvement in LTV.

CFO Ben Kung said the ads performance in Q2 2024 was slower compared to Q1 as marketing spend in the upper funnel brand-related campaigns remains volatile.
EK said in the Q&A that one of the reasons why ad business isn't doing well as they had hoped (expected it to account for 20% of revenue) is probably because the subscription business is doing better than they had expected. That's they are taking some of their best customers (high engaged) and converting them to paid subscribers.
Kung said that in future they plan to make the business more programmatic i.e attract small and medium businesses as well.

Daniel EK said in the Q&A that they are seeing healthy engagements on podcasts.
EK pointed out in the Q&A that enagements in video podcasts are higher than in audio podcasts.
EK said in the Q&A that they are seeing more and more creators upload their video podcasts. He added that they now have about 250,000 audio podcasts.
EK added that they are starting to see a behavior where podcasters post in different platforms to amortize on cost.
EK said he thinks that there are things that will perform better in Spotify such as long content podcasts due to the platform's features.

Daniel EK said they are only going to spend money on marketing if the ROI meets their expectations.