X

Spotify Technology SA (SPOT) Q4 2021 Earnings Call Transcript

Spotify Technology SA (NYSE: SPOT) Q4 2021 earnings call dated Feb. 02, 2022

Corporate Participants:

Bryan Goldberg — Head of Investor Relations

Daniel Ek — Founder, Chief Executive Officer and Chairman

Paul Vogel — Chief Financial Officer

Presentation:

Operator

[Abrupt Start]

I would now like to turn the call over to Bryan Goldberg, Head of Investor Relations. You may begin your conference.

Bryan Goldberg — Head of Investor Relations

Great. Thanks, and welcome to Spotify’s fourth quarter 2021 earnings conference call, and apologize for the slight delay. We were having a technical issue.

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 hashtag Spotify Earnings 4Q — excuse me, Spotify Earnings Q4 ’21. 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’ve got follow-ups, we’ll be happy to address them time permitting. If for some reason you can’t — you don’t have access to Slido, you can email 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 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’ll turn it over to Daniel.

Daniel Ek — Founder, Chief Executive Officer and Chairman

All right. Hi, everyone, and thanks for joining us. Obviously, it’s been a few notable days here at Spotify. When we entered into the podcast space in 2019 with the intent to help modernize and grow the space for all types of creators, we assumed it would challenge and test our teams in new ways. And there is no doubt that the last several weeks have presented a number of learning opportunities. And I hope that you had a chance to read our response that address many of the questions we have received from creators and partners and employees and the medical and scientific communities.

There is still work to be done, but I’m pleased that Spotify is already implementing several first of its kind measures to help combat misinformation and provide greater transparency. We believe we have a critical role to play in supporting creator expression while balancing it with the safety of our users. And we will continue to partner with experts and invest heavily in our platform functionality, teams and product capabilities to meet this evolving need head-on.

Moving on to our results. 2021 was an eventful year for Spotify and the world in general. Throughout the pandemic, this business have seen enormous disruption in consumer behavior causing demand curves to shift, and Spotify of course has been no exception to this. In our case, these shifts mostly played to our advantage in 2020, but we did see some headwinds in the first half of 2021. And by the end of Q2, we saw reversal back to positive momentum, and this trend continued throughout Q3 and Q4.

Historically, Q4 has been our biggest quarter, and 2021 was no exception. In fact, Q4 was our largest quarter of MAU growth in Spotify’s history. It’s a significant MAU driver and — significant MAU driver was our seventh annual Wrapped campaign, which was our most successful to date. With 120 million users, we saw unprecedented engagement, up 29% year-over-year with the highest levels coming from the Gen Z audience. And at launch day, Wrapped was the number one worldwide trending topic on both Twitter and TikTok, proving that it’s more of a cultural phenomenon than ever before.

Ads, while it continued its remarkable growth trajectory turning in 40% growth year-over-year, advertising is showing more proof points of being the second key revenue driver for the overall business, climbing to a record 15% of our total revenues this quarter. While the ad business is more prone to seasonal blips, I see this momentum continuing in 2020 and beyond. And as a result of this strong performance, we will continue to test the different windowing strategies for our exclusive podcast partnerships to get the advantage of that broader audience reach.

Q4 also saw strong performance across podcast metrics, and we have amassed highly engaged audience that is listening more than ever. And last quarter, we confirmed that Spotify had become the number one podcast platform U.S. listeners use the most and we’ve continued to see meaningful market share gains. Overall, I’m feeling very good about 2022.

Let’s move to the long-term, which is where I try to focus my time. We are building a category-defining company, and this takes patience. And some may still describe us as the leading music subscription service, and while this truly reflects where we’ve been, it doesn’t encompass all of the advancements we have been making in the audio. And further, I don’t think it properly captures all the future initiatives that we’re working on either. It is as Jim Barksdale described, it’s conservatively about bundling and unbundling on the Internet.

So what are we focused on then? Well, the best way to describe it is, it’s the subset of the creator economy. People have been talking about the creator economy for some time and it has taken on many different meanings. For us, the single largest trend to keep track of is the rapid professionalized station of creators. And I see this as one of the biggest opportunities on the Internet. And for all of the millions or artists and creators that have leveraged Spotify to date, I think we have only scratched the surface of the creator potential in audio.

To become the preferred destination for audio players, we will accelerate the move from a one size fits all model to a much more dynamic and open platform, and we will give them greater flexibility and the power to be more entrepreneurial, which will of course unlock the extraordinary potential of their business and communities. We will provide greater reach, we will provide tools and access to diverse revenue streams that can be personalized to meet the needs of each creator.

I believe this will all lead to the creation of millions of jobs for the creator economy. And while this is not limited to Spotify, we are building the platform that will enable the whole ecosystem to work together on a global scale. And we think that the Spotify ecosystem alone will encompass more than 50 million active creators, which is a significant increase from the 11 million total that we have today. So think of it as 50 million small and medium-sized businesses that we can support by giving them the infrastructure and resources to grow.

And this evolution will take time, but I know some of you are wondering what this means in the near-term, and the work there is already well underway. This opportunity started to crystallize for me around our acquisition of Anchor, and it’s only grown from there with increasing momentum. It was clear to me from the feedback we heard that Anchor creators wanted more flexibility and more options to do business. And one recent example of this includes the Spotify Open Access platform. We brought it to market last year to enable creators with existing paid content businesses to activate their subscriber base on Spotify. And this means those creators whether they’re an independent podcaster, a major news outlet, an audio book publisher or creator platform can retain full control of their subscription base, while leveraging the reach of Spotify to grow their audience.

And based on the early success, you should expect us to continue to invest in every grown number of tools, resources and services for a broad range of creators. Not one by one, but many in parallel moving faster and faster to bring them to market. While many will be competing to seize a piece of this opportunity, I believe that we are uniquely well positioned to adapt to this changing environment and deliver for the good of the entire audio creator ecosystem.

So now before we go to Q&A, Paul, I believe you are also going to add a few thoughts. So over to you.

Paul Vogel — Chief Financial Officer

Thanks, Daniel, and thanks everyone for joining us. Well, Daniel touched on most of our key KPIs, I wanted to add a bit of color on our gross margin, which finished at 26.5% in Q4, above the top end of our guidance range. Relative to our forecast, our gross margin was helped by a shift in investment costs that were originally targeted for Q4. That benefit was partially offset by an unforeseen expense related to our ads business. Taken together, our gross margin still would have finished above the top end of the range. Some of the investment costs in Q4 that didn’t materialize are not reflected in our Q1 gross margin guidance.

Looking at our full year 2021 margin of 26.8%, we made meaningful progress relative to the 25.6% we reported in 2020. Full year 2021 did benefit from close to 50 basis points of favorable royalty adjustments. However, even excluding them, gross margin was still an improvement year-on-year. Looking into 2022, we expect a continuation of the favorable gross margin trend we saw in 2021 for our underlying business as we grow advertising and drive further growth in marketplace contribution. We also expect improvement in our core podcast margins both on the O&E front as well as on Megaphone.

Given the encouraging traction we’re seeing, we do plan to invest in incremental content and music initiatives in 2022 with an eye towards our long-term goals of 1 billion users, 20% plus revenue CAGR and a 30% to 40% gross margins. While these investments may slightly alter the progress we’ve seen in consolidated gross margin over the past two years, it is exactly this progress that has given us the conviction to increase our investments in certain areas and gives us confidence that we are on the right path over the long-term.

Finally, I want to expand upon our approach to guidance. As we said in our shareholder letter, we no longer plan to provide yearly targets. We will continue to share quarterly guidance as a way to update investors on the current trends in the business. We will simplify our approach by providing a single estimate for each metric instead of a range of outcomes. We are aligning our guidance practices with how we run the business as most of our investments are multi-year in nature and the exact timing of any specific launch may vary within a given year. With that being said, we do not anticipate any material changes in the trajectory for net growth in MAU and subs in 2022 when compared to the net growth we experienced in 2021.

For Q1, we’re expecting total MAUs of 418 million and 183 million subscribers. We anticipate that total revenues will come in at EUR2.6 billion, benefiting from approximately 360 basis point tailwinds to foreign exchange. We’re expecting gross margin to be 25%, primarily due to the cost that didn’t materialize in Q4 hitting in Q1. With respect to the subscriber net adds in Q1, please keep in mind that we expect a different level of seasonality for this metric over the course of 2022 due to anticipated promotional campaign activity and other initiatives. We’re also excited to announce that we plan to host an Investor Day during Q2 where we’ll talk about the big drivers of our business, the investments we’re making and the financial results we expect over the long-term. Stay tuned for more info.

And with that, I’ll hand things back over to Bryan.

Questions and Answers:

Bryan Goldberg — Head of Investor Relations

Thanks, Paul. Again, if you’ve got any questions, please go to slido.com hashtag Spotify Earnings Q4 ’21. We’ll be reading the questions in the order they appear in the queue with respect to help people vote up their preference for question. And our first question today is going to come from Rich Greenfield on Joe Rogan. And the question is, you clearly changed your public stance given the artist pushed back with his content. Is it a slippery slope in censoring content on the platform? And have any advertisers left Spotify in protest?

Daniel Ek — Founder, Chief Executive Officer and Chairman

All right. I’ll take this one. I know this issue has been top of mind this week, but I think it’s important to take a step back. We are trying to balance creative expression with the safety of our users. And of course, this is a very complicated issue, as I noted in my opening. I’m really proud of the steps we took following the concerns raised by the medical and scientific communities. It’s worth noting that both the content advisories comparing the COVID-19 content on our platform with content from physician and health experts, which I talked about in my post as well as well as push policies for creators that are already begun to rollout.

I think the important part here is that we don’t change our policies based on one creator nor do we change it based on any media cycle or calls from anyone else. Our policies have been carefully written with the input from numbers of internal and external experts in this space. And I do believe they’re right for our platform. And while Joe has a massive audience, it’s actually the number one podcast in more than 90 markets, he also has to bide those policies. So I think when you think about that and you think about the ads business, I have a tremendous amount of confidence in that. And of course, we are hearing from our partners that Spotify has a broad range of content on our platform. So there really is something for everyone here and for advertisers to pick to as well.

Bryan Goldberg — Head of Investor Relations

All right. We’re going to go to our next question from Richard Kramer. Nearly four years after your direct listing and facing the renegotiation of publishing rights post 2022, do you see material opportunities to raise gross margins in the music business given the role of labels and publishers?

Daniel Ek — Founder, Chief Executive Officer and Chairman

Well, I kind of alluded to this in my opening remarks, but I think the — perhaps number one misconception I see people making is that they think everything is an outcome based on negotiations with the industry in these renewals that we constantly are doing, and this is true by the way. We do renew our label and publishing licenses pretty much every year. There’s always one big upcoming renewal that we’re constantly working on. But everyone thinks that it’s really a function of that and that alone.

More and more, if we are building this creative platform, it will not be a function of just those licenses, but more and more, it will be based on these tools and services that we’re building for creators on top. The good example that we’ve talked about before has been the marketplace efforts that we’ve been building on and that we have shared in prior quarters and also this quarter, the success that that’s having. And all of those things are things even though we don’t break them out, that you can see is impacting the gross margins positively and have been over the year. And I think it’s important to say that because if you take a step back, going into 2021, our expectation for gross margin we have far surpassed and done much better. And those tools and services that were built is part of that story.

Bryan Goldberg — Head of Investor Relations

All right. Next question from Mario Lou on subscriber net add trends. You’ve averaged 27 million net sub-adds annually for the past few years, is that still a benchmark to use for 2022? And are there any puts and takes that would cause a divergence from historical trends?

Paul Vogel — Chief Financial Officer

Yeah. Thanks, Mario. So I’ll first of all just kind of reiterate what I said in my opening comments is that, although we’re not giving full year guidance anymore, if you look at the net additions we achieved for both users and subs in 2021, we don’t see any material change in that trajectory into 2022. So that’s sort of how we’re thinking about at a high level the 2022 numbers.

And then just when you look at Q1 in particular, there is different seasonal trends and patterns in each year. What we’ve seen over the last couple of years is Q1 has become increasingly less important to us for yearly growth. Last year, in particular, we changed the cadence of some of our promotional activity. We actually had three campaigns for subscribers at varying shorter lengths but more frequently, which changed the seasonality throughout last year, more heavily weighted in the Q2, Q3 and Q4 and we’re likely to see similar types of seasonality again in 2022.

Bryan Goldberg — Head of Investor Relations

All right. Another question from Rich Greenfield on the advertising opportunity. You’ve talked about advertising becoming 20% of revenues, if not, 30% to 40% longer term. While you’re no longer giving full year guidance, how do you think about the trajectory of getting to 20% and what are the key puts and takes?

Daniel Ek — Founder, Chief Executive Officer and Chairman

Yeah. Thanks, Rich. So I think obviously it’s hard to predict long-term exactly how it will play out. And I think when you look at platforms overall in this space and the mix between different options, I think I’ve alluded to this in the past, I don’t think many of these content platforms in the future going to be single revenue stream. I think they’re going to be multiple revenue streams and it’s really just about the mix.

We start from the paid and we’re obviously growing into having both advertising and paid. And there will be some other platform that start with advertising and then starts adding more paid content as well. So I really think it’s the combination of subscription, a la carte and advertising the long-term will be the revenue mix.

Now speaking specifically to advertising, what is the primary puts and takes. They really at this present moment comes down to two things primarily. One is inventory. We see an enormous amount of demand from advertisers. And the number one thing that we’re stretched for at the moment is more inventory. And that’s why you see us introducing things such as fan and other things. And then long-term with a little bit more horizon, it’s obviously international. So many platform start out monetizing the U.S. and U.K. very well, but it takes a little bit more time to monetize the international markets. I don’t think we will be an exception to that.

So long-term, I think it will be more geographical things too, but there is really positive signals in those markets too. I remember going back to the Chinese market 10, 15 years ago. There was a huge debate whether advertising was a viable model at all in the Chinese Internet market, and now you see gigantic companies being built with advertising as the number one source. And I think that bodes really well for regions such as India, Indonesia and others too where Spotify obviously had enormous success. So that’s also how you should read into those investments. It may not be large from a revenue perspective today, but I’m absolutely confident that by investing in these markets and becoming the number one audio platform there, that’s going to be a very worthwhile position to own in the long-term.

Paul Vogel — Chief Financial Officer

Yeah. And I would just add a couple of points. One, if you just look at this year, for the full year, we finished at 12% of revenue, 15% in Q4 and that was up from 9% of revenue last year. So we saw a nice growth there. Clearly we saw a lot of strength in the advertising business coming out of 2021, which we continue to see in the start of 2022.

I would also kind of echo what Daniel said about the international, I think we talked about this last quarter about an investment push we’re making to actually expand our advertising presence outside the U.S. We’ve had a blueprint in the U.S. that has worked really well for us, and you’ve seen that in the growth we have both on the music side and the podcasting side. So we expect that that investment we’re making throughout 2022 will drive significant improvements on the advertising monetization outside North America.

Bryan Goldberg — Head of Investor Relations

Okay. Next question is going to come from Batya Levy on premium ARPU. How should we think about premium ARPU trends in 2022? Will your recent price increases offset the pressure from growth in lower ARPU regions?

Paul Vogel — Chief Financial Officer

Yeah. So I guess just taking a step back, we saw a nice growth in ARPU throughout the year and finished Q4 up 3% and up 1% on a constant currency basis. So we feel good about the trajectory in ARPU. Some of those price increases will continue in the first half of the year, which will help. And I’d say, in general, we expect ARPU to be kind of flat to up a little bit in 2022.

Bryan Goldberg — Head of Investor Relations

All right. A question from Matthew Thornton on advertising. You’ve talked about being supply constrained in this part of your business. Can you update us on the supply-demand conditions you’re seeing and the key drivers of supply in 2022?

Paul Vogel — Chief Financial Officer

Yeah. So I would say a couple of things here on the demand-supply side. First of all, we’ve grown podcasting in general — well, music overall and podcasting as well as a percent. We’re seeing engagement increasing across the platform, particularly in podcasting. We’re seeing consumption increasing. All that is leading to more inventory, which is great. We’re seeing more publishers in span, up double-digits quarter-over-quarter. So that’s allowing us to see more inventory. And then what we’ve also seen is that with span we’re able to monetize really well. And because we’re monetizing, giving people good returns, you’re opting more inventory into the platform for us to sell. And then when we have more inventory to sell on the platform, we get even more advertisers who want to spend and be a part of that. So we’re seeing this nice flywheel effect where the performance of spend is going really well. People are then adding in more inventory into the ecosystem. And then more advertisers want to be part of an even bigger platform. So that’s worked really well, obviously opening span up, and Anchor will be our really strong as well as the potential to be strong for next year as well as a number of other initiatives.

Daniel Ek — Founder, Chief Executive Officer and Chairman

Yeah. And the only thing I’d add is, I think it’s really the combination here. It’s really both about expanding audience, but also expanding the number of creators too. The more creators we have, the more inventory we have to place against it and then obviously the more users will come as a function of the more creators we have as well. So that’s another sort of key components of this, and you alluded to some of that in your question with audio books.

Bryan Goldberg — Head of Investor Relations

All right. We’ve got another question from Matt. Do you have any update on the HiFi tier? What’s been the delay? And does your guidance contemplate any price increases in 2022?

Daniel Ek — Founder, Chief Executive Officer and Chairman

All right. So I’ll start with the question and then Paul can speak to the guidance. So yeah, I mean, many of the features that we talk about and especially that’s related to music and some into licensing. And so I can’t really announce any specific on this other than to say that we’re in constant dialogue with our partners to bring this to market.

Paul Vogel — Chief Financial Officer

Yeah. And then with respect to price increases, we haven’t commented anything at this point in time. I’d go back to earlier in the year when we did make some price increases we feel really good about. The churn characteristics there wasn’t anything material as well as gross intake where there wasn’t any material changes. So we feel good about the ones we’ve already put in place, but no comments or updates on any additional price increases moving forward.

Bryan Goldberg — Head of Investor Relations

All right. Our next question is going to come from Deepak on premium subs. Can you give us some color on your premium sub guidance of 183 million? Is there any impact from changes in promotions or incremental churn that’s weighing on sub growth for first quarter?

Paul Vogel — Chief Financial Officer

Yeah. So addressed this a little bit earlier, but let me just kind of give a little more color. It’s really a lot about the promotional cadence and the seasonality throughout the year. So as I said, if you go back a couple of years, historically we had always done promotional campaigns in Q2 and Q3, and there was always some seasonality between Q1 and Q3 relative to Q2 and Q4.

Last year, we actually tested an additional campaign in Q3. And so instead of having two campaigns we had three campaigns, and those campaigns were actually a little bit shorter in length in each period. And so that impacted the seasonality in 2021 and that will likely impact the seasonality in 2022. Additionally, when you look at Q4 in general, it just continues to become a bigger and bigger quarter for us. And so we saw both the success of the seasonal campaign in Q4, number one. And then the success of Wrapped also which drives a lot of incremental traffic to Spotify. And so when you look at Q1, in general, it continues to become just a smaller part of our overall subs picture every year, part of it’s just the hangover or the follow through from how strong Q4 tends to be. And it’s also a part of how we’ve now adjusted our promotional cadence throughout the rest of the year.

And with respect to churn, while we don’t give out churn guidance, churn has continued to come down, it’s down year-on-year. When you look at our core churn of our monthly subscribers, we feel really good about the trajectory that churn has been on.

Bryan Goldberg — Head of Investor Relations

Okay. Next question from Andrew Marok on gross margin. How much do content investments play into the first quarter gross margin guidance. Is there anything notable driving the year-on-year decline?

Paul Vogel — Chief Financial Officer

Yeah. There’s a few things in Q1. One is, as I mentioned, there was an initiative we were going to test in Q4. That test got pushed to Q1. So there is some incremental there. And there’s a few other things. The first year of lyrics which will have a little bit of impact and the rest is investments.

As you’ve seen on the content side, we’ve had a lot of success, particularly in U.S. And so some of the content will continue to go to U.S. growth, but then as well as expanding a lot of our strategies and innovation [Technical Issue] feel really good about gross margins and how it’s progressed over the last two years. It was up in ’20 and again in ’21. And when you look at sort of the core fundamentals of gross margins and the things that we’re doing year-on-year, we’re seeing a lot of leverage, particularly on core O&E podcasting as well as benefits from marketplace and advertising. And so gross margin in 2022 is really that confidence in what we’ve already done, which is giving us that confidence to continue to invest in 2022.

Bryan Goldberg — Head of Investor Relations

All right. Next question from Justin Patterson on the 1 billion user opportunity. Daniel, last year at the StreamOn event you previously spoke to 1 billion user opportunity over the coming years, what are the key investments to get there? Is it implies a significant step up from the current MAU base?

Daniel Ek — Founder, Chief Executive Officer and Chairman

Yeah. I alluded to some of this in my opening remarks, but we think a very, very key effort in that is coming from the 11 million total creators that exist on Spotify today to 15 million active creators on Spotify in coming years. That amount of content you’re going to see, a lot more engaged and with the tools that we’re building both for creators and consumers alike, you’re going to see consumers and creators expand their engagement in totally new ways that we think define what this next generation of audio will look like. It’s a little bit of a push. I would want to end by saying that you’re going to hear us talk a lot more about this during our Investor Day. So really hope to welcome all of you there to learn more about what our plans are for the coming years in that area.

Bryan Goldberg — Head of Investor Relations

Okay. Next question from Ben Swinburne. Couple of questions in here. Does the first quarter premium guide reflect elevated churn from the recent Joe Rogan controversy? And are there any additional steps you plan to take to contain potential fallout? And then separately, can you put the audio books opportunity in context for us?

Daniel Ek — Founder, Chief Executive Officer and Chairman

Yeah. So for the first time I think I have actually answered a guidance question, but I’ll start there. No. So the easy answer is we don’t reflect any churn from the recent Jerry thing. In general, what I would say, it’s too early to know what the impact may be. And usually when we’ve had controversies in the past, those are measured in months and not days. But I feel good about where we are in relation to that, and obviously, top-line trends looks very healthy still.

So in terms of the steps that we’ve done, as I have outlined, we’ve taken pretty dramatic steps on Sunday in my blog posts, three things. One is publishing our policies and making them clear to the world. Just an acknowledgment from my side. That’s probably late. We should have done it earlier, and that’s on me. But the second thing is very, very big and no other audio platform has done this, and that’s providing this content advisory notice next to COVID-19 content. So all COVID-19 episodes will be tagged with this that then will linked to accompanied messaging by scientists, physicians and public organizations like the CDC and WHO, etc. You’re going to notice this, and this is being rolled out right now as we’re speaking. So this will be very prevalent, very visible, at the very top of every episode that speaks about COVID-19. I feel really good about what we’re doing there and is really unprecedented compared to any other audio service what you’ll see us do in the coming days.

So the last thing then is, you put the audiobooks opportunity in context for us. So I think that there’s two modalities of audios from what’s simplify. We have the podcasting which is what we’ve mostly been speaking about in the past call, but then there’s also paid audio. And paid audio today is mostly the audiobooks business. So what’s exciting for me is obviously enabling all forms of audio on this platform. And longer term, when I — when we look at this platform, as I mentioned, I don’t think it’s just one size fits all. It’s really about enabling a multitude of different audio creators and we want to be the best place for all audio creators and having the multitude of tools that enables them to monetize that content the best way that they see that fit. That may be through subscription, but it may be also through a la carte and it may also be advertising.

So I think it’s — audiobooks in our view is a subset of the overall audio opportunity, but obviously, it touches a very important creator group which is authors. So we’re very excited about that opportunity. And long-term, I think you can look at markets like China, for instance, to look at just the innovation that’s happening in audiobooks there. For me it’s strange to imagine why not more of that type of innovation have come to many of the Western markets as well. And it’s really in that vein that you should think about the Spotify platform. There is going to be a lot more openness and there’s going to be a lot more flexibility in how we treat content and creators on our platform.

Bryan Goldberg — Head of Investor Relations

Great. Next question is going to come from Eric Sheridan. Coming off the content investments of the last few years, can you update us on management’s longer term thoughts around gross margin trajectory and the mix of headwinds or tailwinds in the coming years?

Paul Vogel — Chief Financial Officer

Yeah. So to start, I’d say at a high level, nothing has changed at all in terms of the long-term guidance we’ve already outlined in terms of where we think we could go over the long-term, that 30% to 40%, which we’ve already talked about. And as Daniel mentioned, hopefully we’ll have some time to unpack that more at the Investor Day in Q2. So that’s number one.

When you think about the headwinds and tailwinds, I think what I would say is, we actually feel like we’re getting nice leverage on a number of the initiatives we already have. So when you look at some of the content we’ve had on, again, for more than a year and you see revenue per listening hour increasing at a faster rate than cost per listening hour, we see that leverage starting to show up. And so the reason we’re investing in more areas because we’ve seen the benefits of the leverage on the products that we’ve had for a period of time right now.

I would say the headwinds, a lot of them are, I would say, self-inflicted. Meaning, we are investing against what we think is an even bigger opportunity. And so we could probably be more harvest mode right now and show near-term more incremental margin expansion. Given what we’re seeing is for the core business, we feel like the investments are really going to pay off, drive even bigger long-term gross margins in the future. So that’s how we think.

Daniel Ek — Founder, Chief Executive Officer and Chairman

One thing I would just add to that is, when you look at it, when we signaled for 2020 and 2021 was actually that our gross margins would go down if the levels of content investments that we were making. But if you look at what actually happened, we’re really ahead of that plan. So a lot of these things are proving out in a very, very strong way in our business, and Paul alluded to some of those. It’s marketplace, it’s obviously advertising and some of those other investments that we’ve been making, O&E content too, which improves that gross margins. We feel very emboldened by that, and that’s honestly the light that you should look at our investments.

Bryan Goldberg — Head of Investor Relations

All right. Next question from Mike Morris [Technical Issue] and do you expect terms to expand going forward? And how can this impact your gross margin progression?

Daniel Ek — Founder, Chief Executive Officer and Chairman

Yeah. So I’ll deal with this. I think the first thing that I would say is, it has very little to do with our current contract period like I alluded to in my prior conversation. It’s more in addition to whatever the contract dictates. But the way you should think about this is that we have a platform and we have a set of licensing agreements that dictates a lot of the content we have on that platform. In addition to that, there is a lot of tools and services that we have on top of our platform and all creators and all consumers can choose to opt into.

And so marketplace efforts are those types of businesses on top of our existing licensed content business. And so what’s interesting for me and how you should think about gross margin progression is obviously each dollar that’s generated by those tools and services that we’re offering, generally speaking, is their software means that they’re more like 80% or 90% gross margin dollars to commit. And as for dealing with Spotify overall, which of course is a lower gross margin businesses that quickly adds up.

Paul Vogel — Chief Financial Officer

I’d say — the only thing I would add on the marketplace side, just to give some context is, first of all as Daniel talked about, you really think about it as really marketing tools that are working. The way it obviously shows up on the P&L is just on the gross margin side, even though it’s really more of a — kind of a marketing type of event. That being said, I think we gave a number of EUR30 million contribution in 2019. 2020, I’m not sure we gave a number, but you can assume it close to double in terms of the benefit. And then we saw a material increase again in 2021 with respect to marketplaces contribution to the product.

Bryan Goldberg — Head of Investor Relations

All right. Another question from Richard Kramer. This one is on engagement. If you’re back to the same level of overall hours of listening, but on a far larger base of subscribers, what does the say about engagement? Does that depend on reopening and commute times?

Daniel Ek — Founder, Chief Executive Officer and Chairman

Yeah. I’m not sure I fully understand the questions, I think I might be missing something here. But actually listening hours per user is actually up, so engagement is actually really strong. We’ve seen — this year was an increase in DAU to MAU. So we’re seeing daily actives overall the platform go up, listening hours per user was up. So our engagement is actually strong and healthy on the platform.

Bryan Goldberg — Head of Investor Relations

Okay. A question from Steven Cahall on the gross margin outlook. While we realize you’re no longer giving annual guidance, do you expect 2022 to be a year of operating leverage at the gross and operating lines or should we think about it more as an investment year as it relates to margin expansion?

Paul Vogel — Chief Financial Officer

Yeah. I would say, I think there are some puts and takes in that and it’s one of the reasons why I kind of gave the commentary I gave at the beginning. I do see, as Daniel mentioned, sort of the core gross margin has gone really well. It’s probably actually ahead of schedule in terms of where we are and where we thought we would be. And so on the gross margin for this year, we’re going to continue to invest. That being said, we’ve seen improvements in areas faster than we thought in the past couple of years. So there’s some puts and takes in the gross margin.

And on the operating side, I do think you’re going to see an increased investment. We’ve talked about some of the things we’re doing on the ad side to grow the ads business outside the U.S., which again, we believe we’re really actually significantly jumpstart the revenue opportunity there as well as things we’re doing on the content side. So lots of puts and takes, but I think we feel really good overall with kind of how we came out of 2021 and where we’re heading.

Bryan Goldberg — Head of Investor Relations

Okay. Another question from Deepak. This one on label relations. Can you refresh us on the timeline for the next round of label negotiations? And what would some of your priorities be in this next round?

Daniel Ek — Founder, Chief Executive Officer and Chairman

Yeah. So what I would say is the timeline for next round of label negotiation is always. So we constantly have some deal that’s being renegotiated or negotiated again that extended pretty much always. So I don’t think 2022 will be an exception to that rule. In general, the key priorities that we’re working towards is just enabling more flexibility on the platform. So that’s what you should expect us to be focused on in this negotiation because we want — we really believe that the more we can act as a true platform where these creators can engage directly with their audience, go from cash casual listeners to fans to super fans, that’s going to unlock the next wave of growth in the music economy.

If you really take a step back and kind of look at it like much of the early days of Spotify was really about stopping piracy, as simple as that. And I think we did a really good job in that. And the next step of that was turning people towards paying for streaming. And now we are more than half of the entire music economy globally is streaming. It’s the most dominant way that the music industry currently exist. But I think the next [Technical Issue] we really replaced one model, right, which is you paid a la carte, which meant that typically the super fans were the ones who are paying for music and the vast majority of people weren’t paying at all. Now we have an ecosystem where hundreds of millions of people are paying for music again across all of these subscription services, which I love because I go back five or 10 years ago, the fact that even one service or let alone every single service could have 100 million subscribers was just nuts for most people to think about. And now you see lots of subscription services getting to 100 million, and obviously, Spotify is one of the largest with our base, and in music we are the largest.

So I think that just shows that scale has been redefined when it comes to the Internet. But what’s true here is that so far right now we’re kind of monetizing everyone with a one size fits all model. Yes, we do have free and we have this paid subscription, but I think the evolution here will be about unlocking true super fans. That’s where the real dollars comes in and that was always the music business to begin with. And when we unlock that, I think we’ll unlock the next wave of growth in the music economy.

So for me, that is the number one thing that I’m focused on unlocking, more flexibility, more ways for creators to use their assets, videos, engage with people, have their content show up in new unexpected ways that will drive engagement and that in turn will drive people to move from casual listeners all the way up to super fan and enables new forms of monetization too.

Bryan Goldberg — Head of Investor Relations

All right. Another question from Ben Swinburne. Despite being your most penetrated in most competitive region, North America continues to be your fastest growing premium base. Is that a sign that the international runway for premium growth remains long or is it that international willingness to pay is a headwind?

Paul Vogel — Chief Financial Officer

No, I think we — first of all, I think we definitely think there’s plenty of growth in both. I think what you’ve seen in a lot of areas is in your more established markets you grow there really fast and then the monetization comes after. And then you grow into newer markets and you get sort of critical mass and then the monetization comes after that. And so what we’ve seen is healthy growth in users and subs across all of our regions. You’ve seen a lot of — in the last couple of quarters MAU growth coming out of rest of world and LatAm and some of our newer markets, and those will monetize over time. And so I think that’s the dynamic we see at play here. So we feel good about the monetization we’re seeing in North America as well as Europe and we see the opportunity continue to grow and expand in LatAm and rest of world and the revenue will then follow after that.

Daniel Ek — Founder, Chief Executive Officer and Chairman

The one additional comment I’d just make is really the one about sort of emerging markets that I made about advertising. 10 years ago people really did not think advertising would be a viable medium in many emerging markets. And obviously, we’re now seeing that that’s not the case. So looking at paid subscription, now a lot of people are saying well paid subscription can’t be a viable means in many of these emerging markets. I think that will turn out to be untrue as well in the coming years, and that’s certainly what we’re investing behind.

That said, there are local nuances in how you market to these customers, how they pay for services too. So we’re doing a ton of innovation on that front. We’re doing weekly payments, prepaid payments. We have tuk tuks driving around in markets collecting physical cash to pay for the script subscription too. It’s really, really staggering and really cool to see all the ways that Spotify is showing up locally around the world.

Bryan Goldberg — Head of Investor Relations

All right. We’ve got time for one or two more questions. We’re going to take one from Mark Mahaney on marketplace. Two-sided marketplace came in stronger than you had estimated in 2021, how do you think about growth for two-sided marketplace going forward? And are there any proxies or bogeys that suggest how big this part of your business could get?

Daniel Ek — Founder, Chief Executive Officer and Chairman

Well, maybe I’ll start and then see if Paul wants to chime in. So yeah, I mean, I’m very pleased with the results of two-sided marketplace. And while it’s still in the early in the early innings, I think both in the tools that we have available now, but just imagine it more as an umbrella for all of the tools that I’ve been sort of alluding to earlier this day too about super fan monetization, about various ways where in audiobooks, you can imagine advertising or a la carte payments, etc. It’s really about allowing more flexibility for creators and consumers alike.

So long-term, I think when you look at the umbrella of marketplace, there will be a lot more for us to do and to launch, and I think the potential is just gigantic. It’s really about unlocking the creative economy. Obviously, in the near-term, there’s lots of puts and calls on how we grow the number of creators that are engaging in the existing products that we have and obviously our ability to ship new products that resonate with the creators and consumers alike. So those are kind of the puts and calls.

And I think Paul talked about this earlier too, the hardest thing for us often times is to gauge exactly when something will launch because we’re always running hundreds if not thousands of different experiments across the platform. I don’t know which exact of these things will resonate by what time or what I can say is that the fact that’s creators and consumers want to interact in new ways and that there will be lots of ways to monetize those relationships, that I don’t think should be questioned. That’s really a massive megatrend on the Internet.

Paul Vogel — Chief Financial Officer

Yeah. And I would just add, I think I mentioned earlier, but we feel really good about how it’s progressed from a gross margin, so I won’t go through the numbers again, but gross profit dollars and it really is a marketing and tools and services that are resonating, and we’ve seen it benefits the P&L.

Bryan Goldberg — Head of Investor Relations

Okay, great. I’ve got a question here from Hamilton Faber. Can you update us on the performance of the new markets that you launched in 2021? And how have they performed relative to expectations?

Daniel Ek — Founder, Chief Executive Officer and Chairman

Maybe I can start and then Paul can chime in. We probably won’t break out a lot of markets, but I’ll make an exception here now. It’s never what you imagine when you launch them. There is an example. One of the highlights we have over — one of the most addressable markets is Venezuela. And I don’t think that we have not won all our bingo cards, that’s being one of the more successful breakout markets of the early ones. But honestly, when you look back — when we’ve made these batch launches before, which we’ve made a number of different times, we had a very similar one in LatAm, it follows very much the same trajectory.

So you launch these markets. It’s very hard to predict where it will be easy, where it will take a little bit longer. Early on, for instance, Mexico in the LatAm launch was a very tough markets where Argentina turned out to be a very easy growth market when we launched many years ago in LatAm. And when you look at it now, just two years after that, it completely switched and Argentina turned out to be harder growth and Mexico was sort of growth in diving. And then later on than that Brazil came kind of from nowhere and started taking over and impacting overall growth a lot.

I think you’re going to see us learning and adapting to these markets. Obviously, in the early part, the contribution will be small, but I’m confident that in the coming years that they’ll start impacting the results of Spotify very positively.

Bryan Goldberg — Head of Investor Relations

Okay, great. So that’s going to wrap up the Q&A portion of today’s earnings call. And actually I’m going to turn it back over to Daniel for some closing remarks.

Daniel Ek — Founder, Chief Executive Officer and Chairman

All right. Well, thank you, Bryan for that. And I wanted also to thank you all for joining the call. I really hope you’re as excited about the business as we are. We really just feel like we’re getting started. And we will continue to accelerate our work and the pace of innovation as we pursue what in our view is probably one of the biggest opportunities on the Internet, and that’s the one of the creator economy and the role that we want to play in opening that up for more creators. So I look forward to [Technical Issue] go live on our platform tomorrow. I really hope you guys will tune in. Thank you again.

Bryan Goldberg — Head of Investor Relations

Okay. And that concludes today’s call. A replay will [Abrupt End]

Related Post