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Spotify Technology SA (SPOT) Q4 2022 Earnings Call Transcript

Spotify Technology SA Earnings Call - Final Transcript

Spotify Technology SA (NYSE:SPOT) Q4 2022 Earnings Call dated Jan. 31, 2023.

 

Corporate Participants:

Bryan Goldberg — Head of Investor Relations

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

Paul Vogel — Chief Financial Officer

 

Presentation:

 

Operator

Good morning, and welcome to Spotify’s Fourth Quarter 2022 Earnings Conference 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, Mr. Goldberg.

Bryan Goldberg — Head of Investor Relations

Thanks, operator, and welcome to Spotify’s fourth quarter 2022 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, and using the code #SpotifyEarningsQ422. 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 or 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 don’t have access to Slido, you can email Investor Relations at ir@spotify.com and we’ll add in your questions.

Before I 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’ll 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 & Chairman of our Board of Directors

All right. Hey, everyone, and Happy New Year, and thanks for joining us. We had a great Q4 and ended 2022 strongly. Our user and subscriber numbers continue to climb, showing the value of our investments in the platform over the past few years. We’re now in an even stronger competitive position, and I’m confident in our future prospects. And I’ll let Paul fill in on more of the specific details.

However, a notable call-out in the quarter was our 8th annual Wrapped campaign, which was a big contributor to our Q4 success, and we broke all sorts of records and reached several all-time highs, with an increase of over 30% in user engagement. Wrapped was trending all over social media, but it wasn’t just about Wrapped. So, by the end of the year, we had more than a 100 million tracks on our platform and more than 5 million podcast and more than 300,000 audio books being enjoyed by almost half a billion listeners.

In 2021, we said that 2022 would be an investment year, and it was. And in light of our recent news on cost and staff reductions, I’m sure some of you are wondering if we believe that that investment was the mistake. And the answer is no and yes. I still believe it was the right call to invest, and I would do it again. So, for instance, in the last 12 months, we grew our users substantially, enhanced our capabilities, developed a better product and brought more content to creators and users around the world, and we also made tremendous stride in setting Spotify apart from everyone else in our space.

In addition, my expectation was never that these investments would have great impact in the short-term, yet they have. But more importantly for our shareowners, I fully expect that they will continue to pay dividends in the months and years to come. But things change, and the macroenvironment has changed significantly in the last year, and in hindsight, I probably got a little carried away and over-invested relative to the uncertainty we saw shaping up in the market.

So, we are shifting the focus on tightening our spend and becoming more efficient. This remains consistent with the plan we outlined at Investor Day, but you should expect us to execute on it with even greater intensity given what I just said. However, to be clear, this doesn’t mean we’re changing our strategy. We will continue to work to build a platform of the future, and that will take investment in new opportunities that we outlined like podcast and audio books.

And if anything, thanks to our position in users and subs, this should allow us to both increase revenue per user, over time, as well as improve our stickiness with consumers even more. But going-forward, we will do it with an intense focus on efficiency, and that marks a pretty big shift in how we will act. And to meet this objective, we are also rethinking how we operate. We’ve set-up a new org structure that streamlines decision making and prioritizes speed and efficiency.

2023 marks a new chapter for us, but our commitment to achieving our goals remains the same. Now, I’m really optimistic about the direction we’re headed in, and we’ll continue to focus my efforts on guiding the long-term success of the company.

And with that, I’ll hand it over to Paul to go deeper into the numbers and then Bryan will open it up to Q&A.

Paul Vogel — Chief Financial Officer

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. Let’s start with Q4. User growth was very strong in the quarter. Total monthly active users grew to 489 million in Q4, this was 10 million ahead of guidance, up 33 million quarter-over-quarter and the largest Q4 net additions in our history.

Moving to Premium, we finished the quarter with 205 million subscribers, 3 million ahead of guidance, thanks to broad-based strength across several regions, particularly Latin-America.

Our revenue grew 18% year-on-year to approximately EUR3.2 billion in the quarter, reported results were aided by a 600 basis-point currency benefit. However, this was 200 basis-points less than forecast. So, while reported revenue was a touch below forecast, our organic growth on a currency-neutral basis modestly outperformed due primarily to advertising.

Turning to gross margin, gross margin of 25.3% was above guidance by 80 basis-points due primarily to lower podcast content spend along with broad-based favorability in our core music business led by strength in Marketplace.

Moving to operating expenses, growth in the quarter was lower than forecast, due mainly to currency movements and to a lesser degree lower marketing spending. When combined with our better gross profit, our operating loss was ahead of guidance by EUR69 million.

As we previewed last quarter, free-cash flow was negative in Q4, due primarily to timing shifts around certain payments. However, we continue to generate roughly EUR200 million in free cash flow on a trailing 12-month basis, and we expect to be free-cash flow positive for the full year of 2023.

Looking ahead, we are pleased with our momentum into 2023. When combined with our increased focus on speed and efficiency, we are confident in our ability to continue our double-digit top-line trajectory in conjunction with improvements in profitability.

With respect to first-quarter guidance, we continue to see strong momentum in MAU and anticipate reaching half a billion users by the end of Q1. On the subscriber front, we expect to add about 2 million net subscribers bringing total subscribers to 207 million. We’re also forecasting EUR3.1 billion in total revenue, a gross margin of roughly 25% excluding severance charges and an operating loss of EUR194 million, with the latter reflecting EUR35 million to EUR45 million in severance charges within our operating expenses.

While we no longer give full-year guidance, full year 2023, we see strong growth for both users and subs. So, we’re feeling good about the momentum exiting 2022. Gross margin and operating expenses are expected to improve throughout the year as we have mentioned previously, while free-cash flow is expected to be in line with historic averages. Given many of the adjustments we made at the start of 2023, including our decision to reduce our workforce by 6%, we see our operating expenses growing slower with improvement in our operating loss compared with 2022. This is according to plan, but, as Daniel mentioned, we are entering a new area with even more focus.

And with that, I’ll hand things back to Bryan for Q&A.

Questions and Answers:

 

Bryan Goldberg — Head of Investor Relations

Thanks, Paul. Again, if you’ve got any questions, please go to slido.com, #SpotifyEarningsQ422. 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 Matt Thornton on subscribers and pricing. Has Spotify seen any lift of subscribers from recent competitor price increases? If not, does this give Spotify increased confidence to take price, and what are the reasons if any spot would not take price?

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

I’ll take this and feel free to chime in, Paul. So, I think the most thing if we kind of up level this is our priority is to grow revenue as fast as we possibly can. So, when we look at the market, there is generally two strategies we can do that. One of those strategies would be to grow the number of people that we can attract to join our platform, and the second strategy would be to increase the revenue per user that we already have on the platform.

So, generally our approach when we’re early in a market is to try to grow the number of participants on the platform, and the usual way to do that is not to try to increase prices too early, but keep a competitive price that attracts the most amount of users onto the platform. And then as the market matures, then obviously it will shift more so that most of the revenue growth comes from price increases. So, to put things in context, in 2022, we increased our price point in more than 40 markets around the world. So, it’s definitely something that we’re doing and we’re looking at it as a balanced portfolio approach, where in small markets, we’re selectively [Technical Issues] mature place, in some markets we’re mostly focused on growth. So that’s our general approach, and I don’t have anything specific to announce at this point, but we are constantly discussing with our rights holder partners around various price increases that we would be doing. So, we would always look at what’s net beneficial to our business in growing the revenue and growing the profitability in each market we’re in.

Paul Vogel — Chief Financial Officer

Yeah, I would just add, in terms of just the subs outperformance in Q4, it was pretty broad-based. So, it was broad-based globally, it was broad-based by product. We had strength family plan and duo plan, and we had outperformance of [Indecipherable], there was outperformance in pretty much every region, so it was pretty broad-based. And we had success with our holiday campaign which was in December, and Wrapped was a huge success as well sort of driving traffic to Spotify. So, the overall subs outperformance was pretty broad-based.

Bryan Goldberg — Head of Investor Relations

All right. Our next question is going to come from Michael Morris on music economics. Universal CEO recently called for a change to the streaming music business model, sighting an increase in lower-quality content diverting economics away from artists. Do you believe this is happening on your platform? And what do you see as the path forward with your music label partners on this topic?

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

So, first off, we have great relationships with all of our music partners, and are in constant dialogs with them about their performance and our performance in all the markets around the world. But I think the most important thing to perhaps note is that much like other forms of media, one of the most interesting changes that’s been happening is obviously that people’s music taste is becoming more personalized, and as people’s music taste is becoming more personalized, you’re seeing two things happening. The number of artists that are mattering for users are increasing materially. And the other change is that unlike in the early eras of streaming, we’re seeing notable increase in local repertoire. So, for instance, if you look at many of the local geographies now, you’re seeing a lot of, take France as an example, you’re seeing a lot of French music actually being very impactful in Poland, you’re seeing a lot of Polish music being very impactful as well. So, I think there is a lot more artists that are mattering now than perhaps ever before, and obviously the big sort of counter to that would be — doesn’t mean that you can sustain yourself, or is it more one-hit wonders, and I think you’re seeing a little bit of both happening in the music industry at present moment.

I think some of these trends are very powerful and very good I think for consumers, with more choice and more artists making their way, and then you need to balance that, obviously, with having the ability to have sustainable artist careers on the back of that too. And that’s a constant dialog that we’re having with our label partners, but I would mostly say that most of what we’re seeing is quite encouraging, because of all the response that we’re seeing from artists around the world and their ability to grow their audience.

Bryan Goldberg — Head of Investor Relations

All right. The next question is going to come from Doug Anmuth on gross margin. As you move beyond the 2022 investment year, do you still expect gross margin to expand in 2023? And can you talk about the key drivers?

Paul Vogel — Chief Financial Officer

So, the short answer is, yes. We think Q1 will be the low-point in terms of gross margin for the year, with gross margin improving throughout 2023, so that’s still the plan. When we look at Q1 in particular, our core margin when we look at sort of music and podcasting is improving. Some of the investments we made in the back-half of the year is still slightly impacting Q1. We think those will sort of continue to moderate throughout the year, which will help partly help gross margin.

We’ve talked about the improvements in podcast gross margin as well. So, we expect that to get better throughout the year. So we do expect that Q1 will be the low-point for gross margin, and we do expect for it to improve throughout the year with hopefully a nice trajectory heading out of 2023.

Bryan Goldberg — Head of Investor Relations

All right. Our next question comes from Maria Lou on operating income. You mentioned in the deck an expectation for meaningful improvement in operating income in fiscal ’23 and beyond. That being said, is there a rough timeline with regards to when we should expect overall operating income to reach breakeven?

Paul Vogel — Chief Financial Officer

Yeah, we haven’t given a timeline that I would say, first thing is, I think you can expect to see a meaningful improvement in the operating loss in ’23 relative to ’22. So, we expect that to be pretty significant. Again, as Daniel mentioned, we invested a lot in 2022, so we’ll get some of the leverage on top of that investment in 2023 along with higher revenue growth and more gross profit dollars. So, we expect that to improve and improve throughout the year. Exactly when we break even, we haven’t said yet, but we feel like we’re on a good path, and we feel like we are in a good position right now to have that speed and efficiency that we want to have in 2023.

Bryan Goldberg — Head of Investor Relations

All right. Another question from Matt Thornton on margins. Do you still expect 2022 to have been the peak drag from podcasts? And podcast, do you still expect podcast to reach breakeven within several years? And three, do you still expect the consolidated gross margin to reach 30% within five years?

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

[Speech Overlap] and then you can chime in, because I think some added context here, might be pretty good as well. So, I think the big thing that I just want to highlight again is, we mentioned, as Paul said, before the 2022 would be an investment year, and we broke out the various verticals where you would see that music have been making steady improvements, but obviously our podcasting business had been a drag to our gross margin profile.

And we also then announced that 2023 would be a year where you’ll see the reversal of some of those trends. So, I just wanted to add that context that’s still very much on the top line for us that you should expect music to be meaningfully improving with things like marketplace playing an important role, and then podcasting both grows in size with advertising revenue, but also more efficient spending will mean that you’ll see improvements there as well.

And then, Paul, maybe you can chime in on the detail of question.

Paul Vogel — Chief Financial Officer

Yeah, I could be quick now. So, the answer is yes to 2022 being the peak drag from podcast. Yes, the podcast reaching breakeven within several years. And yes, we still believe our consolidated gross margins can reach 30% in five years.

Bryan Goldberg — Head of Investor Relations

Okay, our next question is going to come from Justin Patterson. This is for Daniel. As Alex takes on responsibility as Chief Business Officer, how should we think about his priorities and leadership for Content and Advertising, how those might differ from Dawn’s.

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

I don’t think from a strategy point of view, that it will defer all that much from Dawn’s. However, again, the primary reason why we did this reorg was to drive speed and drive more efficiency. So, speed will come in having more decision making and faster decision making. Essentially Spotify is a lot more complex of a business than it was several years ago. And so, to have both Gustavo and Alex help me in the day to day in this much more complex business I think will materially mean that we’ll have more brains thinking about these things, we’ll be having more decision making so that we can make decisions faster, because that honestly is one of the biggest locker at this point. It’s not that we can’t execute on the ground, it is actually making real sort of material decision making at the top that’s been one of our things that we need to speed up when we look at sort of the internal feedback. And then, we’re going to holistically now look at the business rather than looking at things bit by bit, so marketing was under Alex’ preview previously, but not advertising and not content, and now we’re holistically looking at it as one P&L and focused on driving efficiency across the board by readdressing resources to where it’s most needed, and that will be a big improvement from prior setups.

Bryan Goldberg — Head of Investor Relations

All right. Next question from Doug Anmuth on users and subscriber growth in ’23. How would you think about 2023 net-adds for MAUs and premium subscribers relative to your performance in ’22? What are some of the puts and takes here?

Paul Vogel — Chief Financial Officer

So, obviously, we don’t give 2023 guidance anymore. I think what we said in my outset is we expect really strong growth. Obviously on the MAU side, ’22 was a real outlier in terms of how much we outperformed, but we see this often where we have some years where we over-index on MAU or we over-index on subs, and it can change even throughout the year in terms of how we’re trending.

I would say in general, anytime we’re growing MAUs, the way we are, it’s always a really good sign of the business, the health of the business and the health of the future subscriber growth for Spotify as well. So, we’re not giving guidance, but I would say we feel really good about the momentum as we exit 2022, we feel good about the guidance for Q1 and how we’re trending.

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

My only addition to that would be, again to note that much of the investments we’ve been making over these past few years that culminated in 2022 was making platform improvements. Improving the number of content we had on our platform, improving the tools for creators and consumers like and that has led to better acquisition and better retention of the consumers really across the board. So, I feel really good about that, and as I mentioned in my opening remarks, some of these things we expected to take longer on seeing the benefits, but we’re seeing them already in 2022, and I think that’s a real positive news for the years to come.

Bryan Goldberg — Head of Investor Relations

Okay, our next question is going to come from Michael Morris on Advertising. How has advertising revenue been trending in the first quarter of 2023? Do you expect the relative performance of podcasting and music growth to persist in 2023? And how far forward you have insight into demand trends?

Paul Vogel — Chief Financial Officer

So, if you kind of take a step-back and you look at sort of just advertising in Q4. Overall, it’s definitely continued to be very up and down. So, in Q4, we outperformed our expectations, admittedly those were lowered expectations. So, we had kind of lowered expectations coming in, in Q4. We actually outperformed those by about EUR50 million or so plus or minus. And even within that we had two months that outperformed and one month that underperformed. So even within Q4, it was pretty up-and-down. So, in Q1, we probably expect more of the same. We feel really good about the ad stack we’re building. We feel really good about some of the acquisitions we’ve made, obviously it at the high level Megaphone, but Chartable and Podsights and our ability to improve measurement and attribution across all of advertising. And so we feel good about that and where the tech is going, and then it’s really going to somewhat depend on just how the macro rolls out overtime, and so it’s been uncertain. I think we’ve done pretty well, like I said, we slightly outperformed in Q4, and we’ll see how the year unfolds.

Bryan Goldberg — Head of Investor Relations

Okay, next question is from Benjamin Black on Marketplace. You had expectations for approximately EUR200 million in Marketplace revenue for 2022. How did you track versus expectations? And how should we be thinking about the trajectory of Marketplace in ’23?

Paul Vogel — Chief Financial Officer

So, we outperformed that EUR200 million. I think we had said at the Investor Day that we expected Marketplace to grow at least 30% in 2022, it exceeded those expectations pretty nicely, so we had really strong marketplace growth overall in 2022, and again we feel that product has a lot of momentum behind as well and expect good things in 2023 as well.

Bryan Goldberg — Head of Investor Relations

Okay, another question from Michael Morris, can you share detail on the investments that have impacted premium gross margin? What types of products are being invested in? When do you expect them to be released, and what is the projected path to contribution?

Paul Vogel — Chief Financial Officer

So, there’s a number of things that go on there, a lot of it is things that we test and learn. We don’t always talk about them some of things that come out six, nine, 12 months later. And so, when we talk about the investment year, some of that is part of what was going on. It’s things that we think are going to drive improved engagement in producers, improved subscribers and some of it we have to absorb the cost as we’re testing. So, we don’t go through all that we do, sometimes 10, sometimes 100s of those within quarters, but again, I think we believe we’ll get the benefits of some of those moving forward into 2023, and you’ll see the incremental investment slow and the benefits kind of hit in 2023.

Bryan Goldberg — Head of Investor Relations

Okay, next question from Rich Greenfield on Audiobooks. Is Audiobooks as a category working? Was it a mistake, and how has it impacted your thinking about new categories, some of those new categories UTs at the Investor Day?

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

Yeah, I mean, it’s early days on Audiobooks. That’s kind of what I can say. We are seeing some encouraging signs. We’re definitely seeing people take up the offering, but we’re nowhere done from where we want to be and where we believe the category can be doing, but I would just rather than perhaps giving any specifics here or preannounce things, I think that the most important thing I can do is trying to give context in that there are two types of companies, there is the company that waits until it gets things perfect the first time and then it tries to launch something that’s perfect, and then there’s the company that have released something that it knows needs work and then rapidly improves from there. We’re definitely the latter. It’s hard for people to understand when they’re looking at us, because it looks like it’s an inferior product or an inferior strategy. We have the same notion around podcasting, how is this thing go into. When podcasting these many years ago when we announced that, and yet now four years later, we’re the leader in that space.

So, I think as you’re looking at our strategy now, you shouldn’t draw any the two big conclusions that we are –that’s our full intent of what we want to do in the category. So, we’re encouraged because we think fundamentally that Audiobooks have a massive opportunity and that there are very few consumers that are currently participating in the ecosystem. If you look compare it to our other verticals, Music and Podcasting, we saw pretty much the same thing. So, nothing has really changed when we look at the space and what the potential is. And now we’re just heads-down focused on executing, and during 2023, you’ll see a lot of new things rollout in the Audiobook category from Spotify.

Bryan Goldberg — Head of Investor Relations

All right. Our next question is going to come from Deepak on User Choice Billing. Were there any noticeable benefits to subscribers from the rollout of Google User Choice Billing in the fourth-quarter, and are you seeing any conversion uplift?

Paul Vogel — Chief Financial Officer

Yeah, it’s still early days, so it’s tough to really know. I would say, in general, I think we’re just overall very excited about the opportunity. The joint flows better giving users the choice on payment methods and how they want to work with us and purchase from us, and so we’re excited about User Choice Billing, we think it’s going to reduce friction and improve conversion over time. It’s still early days in terms of how it’s impacted at this point.

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

It is positive though, so it’s early days but positive.

Bryan Goldberg — Head of Investor Relations

All right. We have got another question from Rich Greenfield on Podcasting. Investors remain sceptical that podcasting is a good business, and that it has meaningfully moved the needle for Spotify. Can you help them understand why you believe in the investment to date, especially in the context of your recent management changes?

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

Yeah. I think the most important thing here is to kind of go back on context. Four years ago, we entered into podcasting. The major player in podcasting had been doing it for 20 years and was considered the sort of unassailable leader. So, we wanted to tackle this heads-on, and we realized again, as I mentioned in my comments around Audiobooks that this was a nascent space, that was growing, albeit, it still was under consumed to what we believe the potential was in the industry, and we took the medium and pretty much have grown overall globally now the audience by a huge margin to what was through four years ago. So, it wasn’t just that we took audience from another platform, but we actually grew the pie meaningfully for podcasters, and as a result, now we have over 5 million creators on Spotify, so a massive increase in the number of people who are creating podcast, you being one of them and you know this is true across the world really at this point.

So net-net, I think we went from being almost nowhere four years ago to now being the leader in many markets around the world in this space, and that adds several benefits to Spotify. It adds the benefit that it makes our business more defensible, because now it is meaningfully contributing to our advertising story. It is also so that from a competitive lens, when we’ve added this content, what we’re seeing is that consumers are not just consuming music on the platform, but they’re consuming music and podcast to a great extent, and the number of users on our platform that are consuming podcast keeps growing as well.

And as that’s happening, their retention increases. And as that happening, it is impacting our business. Now, what you’re probably asking underneath all of that is that it’s been a drag on the gross margin side. So, what does that mean for the future? Well, we’ve been making many investments, some of them have been working greatly, and you should expect us to double down on those and some of them not surprisingly haven’t worked out.

And there are certain shows that work really, really well for us and there are shows that didn’t perform as we expected, and I think that’s a sign of maturity that you go for the growth first and then you seek the efficiency. But generally, what you should expect is across the board now to be focused more on that efficiency and creating more leverage, and that’s certainly true in podcasting too. And the management changes really had nothing to do with a change of strategy in podcasting, it is more around increasing the speed of decision making and increasing the focus on efficiency across the board, because the next era of Spotify is one where we’re adding speed plus efficiency, not just focused on speed or growth at all costs. And that is a big shift, but it is also what we said during the Investor Day in June, and now we’re going to have to live up to that. And I know some investors don’t believe that we’re serious about it, but hopefully, my remarks today shows that we are really, really focused on driving efficiency going forward.

Bryan Goldberg — Head of Investor Relations

Another question from Benjamin Black on pricing. Last quarter, you alluded to a potential win-win with respect to the conversations you’re having with the labels around price increases. What are some of the concessions you’re looking for from the labels?

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

Yeah, I can’t comment on sort of individual negotiations with our rights partners, but as I mentioned before, we’re thinking obviously how we can grow our business the best possible way. Sometimes that is keeping the price low and grow the number of users on the platform, sometimes it is increasing the revenue per user, sometimes it is increasing our margin per user and sometimes it’s all of the above. The important part is, what’s pretty amazing with our Spotify story is that this is something that creates win-wins with our label partners too. They — if Spotify does well in the market, it generally increases the revenues for the labels as well, and we’ve seen that time and time again that this close partnership generates material benefits for both companies overtime, and that’s what we will expect going forward too as we’re driving more benefits for all of our creator partners and Spotify.

Bryan Goldberg — Head of Investor Relations

All right. We’ve got another question from Doug Anmuth on Marketing. How are you thinking about sales and marketing spend for 2023 following the ramp in spend over the past two years?

Paul Vogel — Chief Financial Officer

Yeah, we definitely increased marketing a lot or significantly in 2022. It was definitely a driver of the outperformance in MAU, and it was very intentional. We had a plan to focus at the beginning of the year to really invest particularly in some of our newer markets to grow there, and make sure that we had a foothold that we wanted to have, and by all accounts, it was extremely successful, if not, more successful than we even thought. I do think you’ll see ’23 being — will be more efficient with our marketing spend in 2023. As Daniel said, we’re going to be more efficient, we’re going to be more thoughtful about all of our spending in the 2023. So, no specific guidance, but yes, there was a big ramp in 2022, and I think you’ll see us be more efficient with our marketing spend in the ’23.

Bryan Goldberg — Head of Investor Relations

Okay, another question from Ben Black on Ticketing. Could you give us an update on your ticketing business? Is this an area of focus and how should we be thinking about the business model and the market opportunity?

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

Yeah, and just to level set on context. Long term, I think it’s absolutely a business model and market opportunity for Spotify too. But our strategy is to be an open platform, and we want to enable as much as possible and we are very partner friendly when we’re doing so. So, think about for instance how we’re working with our label partners, think about how we’re working with merchandise and other things too, it is not offering our own solution and locking people in, it is opening up the platform so that creators have as much choice as possible in choosing whatever options they want to do.

So, the primary strategy is very simple. We see a double-sided win-win here, which long term will translate into business opportunity, but our creators are trying to grow their audience on Spotify, they are trying to engage more with that audience and we’re obviously trying to help them monetize that audience even better. A huge part of that is especially for the music audience is obviously touring. So, if we can be a partner to creators and help them sell more of their tickets, that is a meaningful increase to many artists’ livelihood, which is great, and something we’re focused on. But the separate part is on the user side, the same is true as well. One of the big things we’re seeing is, users are asking us, help me find more great things to go watch. And we saw a tremendous uptake in the number of people who are visiting the concerts tab on Spotify in 2022, but the strategy isn’t to go compete with the ecosystem, but rather to enable the ecosystem. And then from there on, there will be opportunities for us to play as well, and you can see that already today where there’s lots of concerts from all the big vendors being available, and we’ll add more and more of inventory, and overtime that will translate into business opportunities for Spotify as well.

Bryan Goldberg — Head of Investor Relations

Okay. Next question from Maria Lou on cost savings. Can you help quantify the annual savings from the headcount reduction you announced last week, and any specific areas of the business to call out that were impacted more so than others?

Paul Vogel — Chief Financial Officer

We’re not going to quantify the savings, obviously, you can do the math, it’s roughly 600 employees that were affected. The 6% was actual employees. We’ve also are looking closely at open head count to see which of those you want to backfill and which of those we will also eliminate as sort of as we’ve mentioned a number of times as we try to be more efficient with deploying capital and employees moving forward. And there wasn’t really any specific area, it was pretty broad-based across most of the divisions within Spotify.

Bryan Goldberg — Head of Investor Relations

We have got another question from Rich Greenfield on the Product. Spotify recently began testing a Friends tab on the bottom strip of the app. Can you help us understand your thinking here?

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

While we do a lot of experiments on the product side in many different areas. So, what you probably have seen is one of those experiments, and since we are not committed to rolling that out, I don’t really have much of our sort of comment, but to say that overall we’re committed to creating the best audio experience for consumers and creators in the world, and obviously social could be a meaningful driver of creating an even stickier and more engaging experience.

Bryan Goldberg — Head of Investor Relations

We have got a follow-up question from Doug Anmuth on Subscribers. You typically see MAU to premium subscriber conversion in the 12 months to 18 months range. Do you expect any change to that conversion or to churn given the large MAU cohorts over the past couple of years?

Paul Vogel — Chief Financial Officer

So, I’d say, look at it at a high level. We’ve said this repeatedly for a while. Anytime you’re seeing accelerating growth in MAU, that always tends to be very good for our business and leads to subscribers over-time. At this point, we don’t see any reason why any of our historical trends would change. It’s always tough to know. But again, given the outperformance in MAU this year, that’s always a good Harbinger for sub growth in the future. And with respect to churn, we don’t obviously give those numbers out. Year-over-year churn though was pretty consistent with where it was at this point last year, so even with the strong growth we’re not seeing any uptick in churn at all.

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

The one addition I would probably just make is that it’s generally been true over the entire existence at Spotify that the longer a person stays with us, the higher the likelihood is that they will end-up being a premium subscriber over time. So, again, country mix changes maturity of those market changes and so on. So, when you look at a cohort behavior, it may take longer in some developing markets than it doesn’t mature markets, etc., but the trend is the same, which is the longer they stay, the more likely they are to convert, and of course the better engaging experience we make, the more likely they are to stay, and therefore the more likely it is to lead to positive business results for us long term.

Bryan Goldberg — Head of Investor Relations

All right. We’ve got time for one to two more questions. We’re going to go to the next one from Benjamin Black on Margins. I think you classified 2022 as an investment year. So, could you break-down which investments are falling off that will drive the positive gross margin inflection in 2023 and 2024?

Paul Vogel — Chief Financial Officer

Yeah, I think, look there is a number of factors that improve gross margin. I think we’ve talked about a lot of them. We’re going to continue to see marketplace growth which will help our music gross margin, a lot of the investments that we did in 2022 that were investments with no real sort of benefit of revenue, will start to hopefully bear fruit in ’23 and beyond. We’ve talked about podcasting that 2022 is going to be the peak year in terms of the drag the podcasting had on our gross margins. So, we expect that to get better in 2023 as well. So, pretty consistent with what we’ve said in the past in terms of what the impacts were in 2022, and how that will change in ’23 and beyond.

Bryan Goldberg — Head of Investor Relations

All right. And we’re going to take the last question from Rich Greenfield on Competition. Does Spotify need to figure out music discovery, knowing that TikTok appears to be ramping-up to launch a music subscription service in the U.S. and Europe later this year?

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

Well, I mean, again we have what I think is a pretty decent music discovery already which works pretty well now. That said, of course, we’re always looking at how we can make that better. And you’re right to point out that TikTok obviously is a formidable competitor I think to any platform in the world today, no matter what field you’re operating in. But we feel pretty good about the improvements we made in the platform already, and obviously I look forward to sharing more on-Stream On, sort of Wink Wink around all the updates that we’re planning throughout the year as well, that I think will mean a lot for both music and podcasting and beyond.

So, we are focused on having the best possible platform we can have for both consumers and creators, that remains true. But I feel candidly that we are in a better position competitively than we’ve been in many, many years. Throughout the existence of Spotify, we have always heard of competitors, and there was always the sort of big scary wolf, whether it was Apple or Amazon in the past, etc., and now it’s perhaps YouTube and TikTok etc., but with both — all the improvements we’ve been making in music, but also with the addition of podcasting and Audiobooks, it is a much more resilient consumer experience, and I feel really, really good about our competitive differentiation, and I think when you look at already our 2022 results on both the MAU side, the improvements in the gen Z are audience in Southeast Asia, those are showing that our products and platform, you know, is very, very favorable in the competitive marketplace.

Bryan Goldberg — Head of Investor Relations

All right. Thanks, Rich, and that’s going to conclude our Q&A session for today’s call, and I’m going to turn it now back over to Daniel for some closing remarks.

Daniel Ek — Founder, Chief Executive Officer & Chairman of our Board of Directors

All right, well thank you everyone for joining the call. I’ll just once again want to reiterate my confidence in the business now as we’re entering the next phase. While it was really great to close out 2022 on such a high note, the fourth quarters I think we’re just really one of many proof points that shows that the investments we’ve made over the last few years are really paying dividends. And when I look at the totality of what we’ve done, the one thing that stands out to me and that it’s not always linear. We try to draw these linear dots, but that’s not how the world works, and what we’ve been going through is really been a multiyear approach that really culminated with what we presented to you the community at our Investor Day in June. And that’s the plan we’re tracking consistently against.

So, I look forward to sharing more about our evolution and all the things that we’re building at our upcoming Stream On event on March 8th. And in the meantime, please check-out our podcast for the record for more details about the quarter. Thank you everyone for joining us.

Bryan Goldberg — Head of Investor Relations

Okay, and that concludes today’s call. A replay will be available on our website and also on the Spotify app under Spotify Earnings Call Replays, and thanks everyone for joining.

Operator

[Operator Closing Remarks]

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