Spotify Technology S.A. (NYSE:SPOT) Q3 2023 Earnings Call Transcript

Spotify Technology S.A. (NYSE:SPOT) Q3 2023 Earnings Call Transcript October 24, 2023

Spotify Technology S.A. beats earnings expectations. Reported EPS is $0.36, expectations were $-0.21.

Operator: Good morning and welcome to Spotify’s Third Quarter 2023 Earnings Call and Webcast. All participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Bryan Goldberg, Head of Investor Relations. Thank you. Please go ahead.

Bryan Goldberg: Thanks, operator, and welcome to Spotify’s Third Quarter 2023 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 Paul and afterwards, we’ll be happy to answer your questions. Questions can be submitted by going to slido.com, S-L-I-D-O.com and using the code #SpotifyEarnings Q323. Analysts can ask questions directly into Slido and all participants can then vote on the questions they find the most relevant. 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. Before we begin, let me quickly cover the Safe Harbor. 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-K. And with that I’ll turn it over to Daniel.

Daniel Ek: All right. Hey, everyone, and thank you so much for joining us. I hope you’ve had the opportunity to review our shareholder deck. Bottom line, it’s a really exciting time at Spotify, and I’m super pleased at how the business is performing. It was a truly stellar quarter and one that clearly illustrates that we’re making great progress against the goals that we laid out for you at our 2022 Investor Day. Q3 was our second largest quarter ever for MAU net addition. And as we look ahead to the end of the year, you’ll also see that we’re forecasting to hit another big milestone, reaching more than 600 million monthly active users at the end of the year, and this puts us well on our way to reaching more than 1 billion global users by 2030.

And to put that number into context, 15 years ago this month, Spotify went live in France, Finland, Norway, Spain, Sweden and the UK. It’s been a wild ride. Next, let’s turn to the strength of our subscriber growth. We walked into 2023 thinking we would do just over 20 million in net subscriber adds for the full year, but we’re actually on track to deliver 30 million, which is a significant beat from where we thought we would be. In fact, this will be the second biggest full year gain in net subs additions since going public. This momentum is especially significant when you put it in the context of the price increases that went into effect in Q3. And as we previously shared, because of our confidence in our product and our ever-expanding content offering, we felt the timing was right to raise prices across more than 50 markets.

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Q&A Session

I know some of you wondered how we’d weather these increases, so I’m really pleased to report that this went as well as we’d hope, even modestly exceeding our expectations. All of this sustained growth is a testament to the exceptional value Spotify continues to deliver globally. And with our new focus on operational efficiencies, we managed to achieve this with reduced marketing costs. The essence of our business model is to deliver unparalleled value to our user base through an ever-improving consumer and creator experience. This is coupled with every now and then expanding our ecosystem through new verticals to deliver even more value. And this, of course, nicely segues into the groundbreaking audiobooks offering for premium subscribers that we announced a few weeks ago.

So not only will our expansion into this category supercharge the growth of the audiobooks format, but it also will drive engagement and reduced churn, which further enhances our value proposition. And this, of course, gives us more flexibility for our business. And while it’s still too early to see the impact in our numbers, initial signs from subscribers in the UK and Australia are incredibly positive as we bring them more content to discover. In the first two weeks since launch, premium subs in these two markets are loving the breadth of titles and have already listened to over 28% of the catalog. They’re flocking to fiction, memoirs, scifi and fantasy. And I can’t wait to see what US subscribers gravitate towards when we launch there soon.

In terms of how all of this flows down to the underlying fundamentals of the business, including, of course, revenue and gross margin, I’ll turn it over to Paul to provide more detail, and then Bryan will open it up for Q&A.

Paul Vogel: Great. 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. Q3 was a very strong quarter. MAU grew by 23 million to 574 million, and we added 6 million net subscribers finishing at 226 million. Both MAU and subscriber growth continued to be well above our historical trend and outperformed forecast. On the revenue front, we grew 11% year-on-year to EUR3.4 billion during the quarter. Importantly, our FX-neutral growth was 17% and accelerated 300 basis points versus the prior quarter’s result, reflecting the early effects of the new pricing and accelerated advertising results. Turning to gross margin.

Gross margin of 26.4% was above guidance by 40 basis points due primarily to favorability in our music business. Moving to operating expenses. Growth in the quarter was lower than forecast due mainly to lower-than-expected personnel and related costs as well as marketing spend. When combined with our better gross profit, we achieved an operating profit of EUR32 million in the quarter. We believe this is an important inflection point for the business as we start to see the benefits of our focus on speed and efficiency and progress towards delivering on the profitability targets we laid out to you at our Investor Day last summer. Finally, free cash flow was positive EUR216 million in Q3. Looking ahead to the fourth quarter, we are forecasting 601 million MAU, an increase of 27 million from Q3 and 235 million subscribers, an increase of 9 million over Q3.

This has us adding about 112 million MAU for all of 2023, which is nearly 60% above our four-year historical trend and adding 30 million subscribers for the year, which is 12% above the historical trend. 2023 should finish with the highest net additions for MAUs and the second largest for subscribers in company history, but actually the largest if you exclude the impact of Russia. We are also forecasting EUR3.7 billion in total revenue, a gross margin of 26.6% and an operating profit of approximately EUR37 million. Turning to revenue. We are forecasting a 300 basis point headwind to growth given the strengthening of the euro relative to the dollar. Excluding this effect, our constant currency revenue will be closer to EUR3.8 billion, reflecting our expectation for accelerating currency-neutral growth to 20% year-on-year versus the 17% growth we delivered in Q3.

This acceleration is aided by a full quarter benefit of the price increases we announced in Q3. In sum, we are very pleased with how we’re tracking into year-end. While it’s too early to give guidance on 2024, I do want to point out that we are confident in our path and expect another year of meaningful progress towards delivering on our profitability goals for the business. And with that I’ll hand things over to Brian for Q&A.

Bryan Goldberg: Thanks, Paul. Again, if you’ve got questions, please go to slido.com, #SpotifyEarningsQ323. We’re going to 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 Matt Thornton on efficiency. Daniel and Paul, you’ve been successful in wringing out cost efficiencies across marketing, personnel and podcasts. Do you feel the business is at steady state now on the cost side or do you see more opportunity?

Daniel Ek: Yes. I’ll start, and maybe Paul can fill in. Yes, we feel, as we walked into the year, just to level set and remind everyone, we talked about having a great product, but also needing to become a great business and to prove that out to investors. That’s been very much the focus for Paul and myself and the rest of the management team throughout this year. And I think you’re really starting to see this nicely being proved out with the delivery of this quarter’s results. But it really is two parts here. One is the thing that I said in my opening remarks, which is we are focused, as always, on providing great consumer experience and creator experience. And that is what allows that top line growth to then translate into that business side.

But the new part of the Spotify modus operandi is our focus on efficiencies. And we’re starting to see some leverage here coming into play, but this is the state going forward. Paul and myself and the rest of the management team is constantly looking at how we can make improvements. And we’re constantly finding new ways to bring more efficiencies out of the business. So I’m pleased with the progress so far. We’ve seen some improvements, but you should expect us to continue to look for more improvements going forward because that’s just our modus operandi.