Spotify Technology S.A. (SPOT) Earnings Call Transcript & Summary

Good afternoon, and welcome to our final presenting company. We are so happy to welcome Paul Vogel, CFO, Spotify Technology. We finally got you here [ after groveling for years ].

And I've known you for so long in so many iterations. So in this current iteration, you've been CFO for almost 9 months. And impressively, the equity value of Spotify has gone up 80% since the beginning of the year. And we know there's a direct connection. [ Everybody knows ] I know that, Paul, there's a direct connection to the stock price performance. So tell us what's transpired. And what are you most focused on currently? And I guess, what are your strategic priorities over the next 3 years or so?

Yes, sure. And first of all, thanks for having me. I'm glad I can make it this year. We were just talking off-line that we normally have an in-person Spotify event this time of year every year. And since it was virtual, I was able to do it. So I'm glad I can make it happen this year. So yes, I mean, I'd love to take full credit for the stock price performance. But I would say I think there's a couple of things. I think a lot of it has to do with kind of where we've been and what we've built up for the last couple of years being a public company and even prior to that. I think there was -- it took a little time, I think, for folks to understand the story, understand what we were doing, what we were building. It always takes a certain amount of time to build up sort of credibility with investors in the market. I think what we've tried to do is create a business where we're going to tell you exactly what we expect to do. We've never tried to sort of game the system when it comes to quarterly earnings or quarterly reports. And I think there was a seasoning period where I think investors have to understand that, look, we're going to tell you what we expect to do. We're going to try and deliver within that range, always at the upper end of that range. And so I think that was that one part of it. I think the second part is we have a podcast strategy, and we've been very vocal about sort of building out podcasting, building out content and having that sort of next leg of growth as an audio strategy and being an audio-first company. I think it also took a little time for people to understand exactly what that meant, how we were going to be able to be differentiated with podcasting, what it meant to have some new and different content, what an audio-first strategy meant. And so kind of building that out was also something, I think, that took some time. So I think that's all starting to be a little bit better understood in terms of kind of where we're headed in -- as a company. I think from a business perspective, obviously, most people on the call know Barry McCarthy, who was my predecessor. Barry left the finance team in phenomenal shape. So from the standpoint of sort of what I'm focusing on, it's really just kind of moving the ball forward. We're really trying to build out a finance organization that's going to be successful not for the next year but the next 3, 5 and 10 years. So we're adding a lot of automation. We're adding a lot of tooling. We continue to add sort of data scientists and those types of capabilities within the finance department to be smarter about how we allocate our assets and how we think about what's working and what's not working and really building out what will be, hopefully, the largest global audio streaming player out there. So that's kind of it from a finance perspective. That's kind of it from where we sort of have been over the last couple of years as a company. And I think moving forward, from a product perspective, we've talked about podcasting. And the growth there, the marketplace strategy is another area where we believe we'll have some opportunities. We're going to continue to invest in differentiation and discovery and AI and machine learning and all the things that have sort of helped us differentiate our product. And ubiquity, which we talked about this all the way back to our Investor Day, we really feel that the fact we are ubiquitous across all platforms, that Spotify works no matter where you are on pretty much any device, has really been a nice competitive advantage to us, and we'll continue to lean into that as well.

So given the current DSP landscape, how are you approaching R&D, innovation and technology to differentiate your service, where there are so many competing platforms offering essentially if not the same but similar content and services?

Yes. So I think -- I mean that's kind of the crux of what we do, is really differentiating by our data and our analytics. And so we believe we've been a better discovery engine. We had a better UI than everybody else. So that's number one. Number two is we continue to sort of double down on AI and machine learning. If you look at it a year ago, we would do hundreds of A/B tests and iterations and testing and innovation within a quarter. Now we do thousands. So we can -- constantly are looking to improve the product and to innovate and bring a better UI, better discoverability, give you a better personalized and individual experience than anybody else is going to get. And it comes from having, a, more data. So we're the largest player out there. We think -- or we believe that our engagement is kind of 2x our nearest competitor from an engagement standpoint. And then when you think about how many more subscribers and then how many more users we have, we said this before, but we believe we get sort of 5 to 10x the amount of data coming into our ecosystem that they get, which allows us to really parse the data in ways that helps the users from a discoverability standpoint and the creators from a monetization standpoint.

Over the last 2 quarters, you've reported MAU, monthly average users, and premium subscriber numbers at the very high end of your guidance range. You just launched 13 new markets, including Russia. How much of a factor are these launches in your guidance for the year? And where could variability come from considering year-to-date trends?

Yes. So well, let me talk a little bit about the sort of principles of guidance and sort of where we set the guidance for the year and how we think about it. When we started the year, we talked about guidance being somewhat conservative. And what do we mean by that? When we know or we believe we're going to launch a new market or do a promotional campaign, all of that is factored into the guidance we give. And so when we give numbers out to Wall Street, it's always sort of under the assumption that anything we know we're going to do, we're going to put that in our guidance. When we talk about being conservative, some of it was, around last year, we had some really impressive increases in retention and reductions in churn, which allowed us to grow users even faster than we thought. And we believed and we hoped that we would see a further increase in retention again in 2020, but there was obviously no guarantee, and we weren't sure if we were going to bake that into our forecast and our guidance. It turns out the retention has continued to move higher in 2020, which is part of the reason we've seen some faster growth in 2020 than expected. If you look at the first half of 2020 from both a user perspective and a subscriber perspective, we've added more net MAU in the first half of the year and more net subscribers in the first half of the year than we did in the first half of 2019. And a lot of that has to do with improvements in retention and improvements in product. If you actually take a step back, and I think you kind of talked about R&D and innovation in some of those things, some of the things we do happen pretty quickly, but some of them take time. And as many of you recall, we talked about some changes we made to our free tier. This is about 2 years ago at this point. And our belief is that would actually help with retention, it would help with engagement. And it took some time for us to really see that. And so you go through a quarter or 2, and we get the question a lot, how much is that helping you? How much is it not? And sometimes, you don't see it right away. But we believe a lot of those changes we've made, which we were then able to iterate on and grow on top of, have really helped. And that's one of the reasons why you've seen retention continue to move up on -- across the board in our free platform as well.

So in Russia, you had a huge first week. We understand it was even bigger than your first week in India. What are some of the reasons after -- reasons why your launch in Russia was so successful? What is unique about that market? And how has that market been trending since you partnered with MTS in August, which is offering over 78 million consumers a 6-month free trial?

Yes. So to your point, and we talked about this, it was sort of the best first day we've had. It's been one of the best launches of new markets that we've ever had. So Russia has been really successful, and I think it's probably twofold. I think one is, like anything else, the more you launch in new markets, the more you have confidence in understanding the go-to-market strategy, understanding the product market fit you need to have, understanding the content you need to have. And so I think that was one part of it. And I think the second part we're seeing is there's just a lot of pent-up demand for Spotify and pent-up demand for our product in markets that we're not in. So we feel really good about how Russia has launched. We feel really good about our ability to get better and better at new market launches. And so yes, we've been really pleased with how Russia has started off.

How much more of an opportunity is there to launch in new markets that have still meaningful potential? And are there markets where major telco deals like the one you did in Russia would -- that would make sense for you as well?

Yes. I mean it's tough to say. I think each market is different in terms of the -- what works, whether it's a telco deal or a different partnership or just going on our own. So I think it's very market specific. We've talked about South Korea as sort of the one kind of really big market that we're not in that we'd like to get into and we plan to. Africa as well. And so there's some pretty big chunks. We're in 92 markets. There's a lot more than 92 global markets, and our goal has always been to be in every market at some point.

So let's turn to some of your more mature markets in Europe and North America, all of which have continued to perform well. What do you think can drive the next leg of growth in these mature -- call it, mature markets? I mean, they're still growing. Is it scale? Is it new promotions, product innovation, podcasting? What do you think the driver is?

Yes. So I think it's a couple of things. I think if you take a step back first, we've had really strong growth in -- I guess what you'd call the more mature markets, I'd say there's still plenty of growth to go in all of them. Again, if you look at North America, for instance, I believe -- and I'd double check it, but I believe in both Q1, Q2 of this year, we grew faster in 2020 in North America than we did in 2019. And so we're still seeing that growth. And I think it's a combination of kind of all the things we've been talking about. I think it's improvements in product, which have led to a strong retention. So that's going to help you with the overall number of users. And then podcasting, we know, has been additive. We believe that it helps with retention and engagement. And we know the more you engage, the higher retention is going to be. So podcast has been a big part of it. So it's really been a combination of a number of things. And we think there's still a lot of headroom to go. There's -- between all of our major regions and the ones we're not in, we feel really good about the opportunity in front of us still.

So even though you've done some testing with ARPU increases in the Nordic countries, you've largely kept pricing -- prices stable across the globe. And you've introduced more promotions like Duo. How should we think about ARPU in the back half of the year and into 2021 and the use of promotions going forward?

Yes. So ARPU has come down. It's come down. So if you take one step back, just to sort of kind of refresh, we've talked about -- since we've been public about LTV to SAC and how LTV to SAC is really how we measure the success of the users and the subscribers that we're growing and that we're bringing onto the platform, and so for us, that's the #1 thing. So as long as we know that our LTV to SAC is positive and in a similar range, we feel really good about the subscribers that we're bringing in. It's been about 2.5 to 3x for the last 2 or 3 years since we've been a public company. It's been pretty stable. And so that's the most important thing for us in believing and understanding that we're actually bringing in profitable subs. So why has ARPU come down, right? So you have this mix of product and new product. And so you've got Family plan and Student plan, and those have had the effect of lowering ARPU. Product has been the biggest single factor that's lowered ARPU. Geographic expansion has been a little bit, and it probably will be more impactful going forward. But it's mostly around the product. And what we've seen about -- around that is there's really high retention of our -- on Family plan. There's really high retention on Student plan. We've been able to grow subscribers and users and grow profitable ones, again, given the LTV to SAC. So that's really been our focus, is market share gains. It's taking share where we could get it and knowing we're doing it in a profitable sense. So that's not -- over the long term, definitely, we will look and think about opportunities to get ARPU moving in -- north as opposed to south. But really, for us, it's been about adding profitable users and profitable subs. And again, with the LTV to SAC in that 2.5 to 3 range, we feel really good about how we've managed that so far.

Right. But when do you think it might make sense to raise prices across a wider portion of the footprint? How do you think about potentially reducing promotions, whether it's more expensive Family plan or allowing less members per plan versus raising the standard price for a single subscriber in any given market?

Yes. I think it's really going to depend. I think you mentioned some of the trials we've done in the Nordics that have gone really well. So there's always an element of where you are in the market share game and where you are in terms of how much of that market share -- well, how big is streaming? How much are we of that share? There's some markets where we still believe and we're going to want to play the market share game and grow it. I think there'll be some markets over time where we'll fill an opportunity that we can maybe be thinking about the ARPU going up, but I don't have a time frame on that. But we'll have to see. It's really, again, mostly been about market share in the past. But looking forward, I'm sure, though, we'll think about how we kind of balance the 2 going forward.

Right. And then our view is that you still seemingly have a humongous and long runway for growth. And within that context, 3 of the top 5 music markets still are largely physical. So can you tell us what you're seeing in those markets, Japan, Germany, France? Since the beginning of COVID, how much have those markets accelerated away from physical, where they presumably couldn't go for a while, towards digital streaming?

Yes. I mean they all have -- I mean some of this -- we don't really talk about any of the countries specifically, so I'll probably talk a little more generally around them. But markets like Japan, we've seen some good growth over the last year or 2. That was a market that, admittedly, we didn't knock it off to the best start for us. I don't think we had the best product market fit. We didn't have all the content we needed. We corrected that over the last couple of years and are seeing growth improve. I think within a market like Japan, you're starting to see streaming grow and actually grow not just within the younger generation. So you're starting to see it finally expand out to a slightly older demographic, which I think will be helpful for everybody. And then within Germany and France, I think you've seen good growth in both of them. Again, Germany is another market that has sort of held on to physical for longer, but I think we've seen some forecasts that show pretty significant expectations for streaming growth in this year and next year as well.

So before we get into some of the new areas of growth, such as podcasting, new tools and services, advertising, et cetera, it would be great to get your view on the power of the Spotify platform. You are the largest customer of all the labels. How do you think about the value of that scale?

Yes. I mean, look, there's always going to be the bigger you get, there's going to be some benefit to being the largest player. But I think for us, it's really about how can we use our presence and our growth to really benefit both the consumers and the creators. And so we've talked about having 1 million artists live off their work and connecting them with 1 billion consumers, and that's really what our focus is going to continue to be. So I think with scale comes the ability for us to help shape and move the market in a direction we think is the smartest, both for -- I guess, for us as a company, what's going to be best for the consumers and, increasingly more and more, what's going to be best for creators for them to be able to maximize and live off their art.

Okay. So let's move on to podcasting. How do you think about the return on your podcast investments in terms of the advertising dollars versus incremental subscribers versus reduced churn characteristics? Will this differ by podcast?

Yes. So I think you touched on something which I think is very important, which is we look at podcasting in general holistically, right? And so there's really 2 components of thinking about like -- just take, again, podcast in isolation. One is the pure financial benefit you're going to get, right? So we know how much it's costing us to add all this content on the platform. We know how much advertising we're getting, and we can sort of do that math. And then there's the other added benefits we see in terms of increased retention, increased engagement, which help the overall ecosystem. There's always sort of a brand marketing component when you have sort of a high level of content on your platform that makes it more noticeable. And so when we think about deals, particularly the larger deals, we're weighing all of those things. So we're thinking about what's the opportunity to grow advertising on that particular piece of content. What's the ability to then grow advertising across all of our podcast content just by having more scale and more distribution across a wider audience? And then from there, we're looking at, okay, how can we monitor and measure the impact that each piece of content is having on new user growth, on retention. And from looking at that, we can actually look at the value of each piece of content differently to try and understand how much we want to continue to invest, in which types of content, in which verticals of content, in which geographic regions. Some of them may be different. And so that's all the work we're doing. We're still in the early stages. Obviously, there's going to be a lot of learning. There's going to be some mistakes we make. There's going to be things that, quite frankly, we probably overpay for. There's things we're going to underpay for that are going to be widely profitable and successful. And as we get -- as we do more, we get smarter and smarter. It's no different than the analogy I made about new market launches, right? The more you do them, the more data you had -- data you have, the more you're able to launch effectively and successfully. It's the same thing with content. The more we are in this content game, the more we're acquiring, the more we're licensing, the more we're developing. We'll have more and more of a better idea of where we want to go with it.

So let's dig into some of the content that you have acquired. What's the opportunity to leverage these investments on a global basis? Do most of these travel well?

I think it's different. Some do, some don't. I think there's -- I'll give you an example. There's a show on Gimlet right now. It's called Sandra, I believe. And we've been able to sort of take that and reformat it, new language, slightly different storyline in 4 additional markets. So it's taking a concept and a platform and moving to other areas. You can think about The Ringer in terms of sports. There's obviously a huge global audience for sports. Bill does a tremendous job at basketball, in particular, which is obviously very global, to be able to expand that. Also, taking formats that we know that work in one region and repurposing it or reformatting it for another region. So we think there's a huge opportunity in between Gimlet and Parcast and The Ringer and then the things we're licensing with Joe Rogan and Higher Ground with the Obamas. We feel like we're really adding a lot to the consumer experience.

So The Michelle Obama Podcast was launched on July 16. How is it performing relative to your expectations? And is it driving incremental traffic, reducing churn? How do you...

Yes. We're not going to give specifics of any one show, but I will say it's done very well. It was the #1 podcast of the summer. It's been hugely successful. We're very happy with it. So now we don't really give out individual kind of details on those streams or share. But like I said, it was really good, and it was the #1 podcast of the summer.

And what is your ultimate advertising opportunity for podcast? And how do you determine whether to use Streaming Ad Insertion or host-read ads?

Yes. So there is an element of host-read ads in Streaming Ad Insertion where the host can read multiple different ads and get inserted into the podcast in different ways. I think, for us, what's really exciting is just innovation in general for ad formats within podcasting. There isn't -- hasn't really been any innovation in the last 20 years. You mentioned Streaming Ad Insertion. We're building out a tech stack that we think is going to be much more dynamic, much better in terms of monetizing advertising for the podcasters and a better return for -- sorry, for the advertisers and more monetization for the podcasters. And so we think there's a huge opportunity for it. We're an audio-first company, so we're steeped in sort of audio and audio advertising. And so we feel really good about it. We mentioned on the call the deal with Omnicom for a big podcast commitment, and so we're seeing more and more traction in podcasting. We're seeing more and more interest in it. And so it's a combination of bigger with more scale, number one, and then having sort of a unique technology offering that can really expand the whole opportunity going forward.

And what portion of third-party podcast could potentially be monetized over time? Would it all be done through Anchor -- the Anchor Sponsorships platform? Can you provide the same capabilities to third-party podcast as you can for your owned and operated podcasts?

Yes. So right now, most -- or actually, all of the new technology, SAI, for instance, we're just doing it for our owned and operated properties, so things we own or license, and we're not doing it for third parties. There's definitely opportunity, I think, over the long term to potentially use the tools and services that we're building out for third-party group -- party growth and other podcasters. We know, for instance, that when we launched SAI, and kind of moving forward, the number of sort of inbound traffic we've gotten from folks who say they want to use it has been pretty high. So we know there's a demand for it. So for us, it's still early stages. We're still testing it out. We're still making sure it works. It's not in every region at this point. So I think as we build it out, there'll be more opportunities to grow and potentially leverage it outside of just our owned and operated properties.

And Joe Rogan's podcast is now available on your platform. Could you talk about the vodcast component, how that works? And what's the difference in monetization between vodcast versus podcast ads? How has Joe Rogan's podcast done in Spotify so far, if you can talk about that? Is there a potential for leaning into more vodcasts and other audiovisual opportunities?

Yes. So vodcasting is interesting because we've seen with some of the highly successful podcasters they've had a video component. It's something in this instance that really matter to Joe and his audience to have that capability. We definitely have more inbound requests for it. It's still early days for us, but we think it adds a really nice element to podcasting and one that a lot of the consumers are looking for. We've been very pleased with how it's gone in the first week. If you look now, the Joe Rogan podcast is the #1 podcast now on Spotify if you look at the charts and -- which is pretty impressive because it's not even -- we're not even in an exclusivity period yet. We're still a couple of months until it becomes exclusive on the Spotify. So we feel really good about kind of how that's launched. And we haven't really talked about anything on the monetization side on vodcasting, on video component there. It's really, really early days. But I think as an ancillary product on top of the audio side of podcasting, we think there's huge potential there.

What's your time frame to determine if the podcast investments are paying off? How much of a long tail on revenues are you expecting? And are you locking up exclusive partnerships for long time periods?