Spotify Technology S.A. (NYSE:SPOT) Q4 2023 Earnings Call Transcript

Spotify Technology S.A. (NYSE:SPOT) Q4 2023 Earnings Call Transcript February 6, 2024

Spotify Technology S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Bryan Goldberg: All right. Thanks, operator, and welcome to Spotify’s fourth quarter 2023 earnings conference call. Joining us today will be Daniel Ek, our CEO; Paul Vogel, our CFO; and Ben Kung, our VP of Financial Planning and Analysis, who has been assisting with the transition while we search for our new 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 #SpotifyEarningsQ423. Analysts can ask questions directly into Slido, and all participants can then vote on the questions they find the most relevant. If for some reason you don’t have access to Slido, you can 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 shareholder deck, and in filings with the Securities and Exchange Commission. During this call, we’ll also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our shareholder deck, in the financial section of our Investor Relations website, and also furnished today on Form 6-K.

And with that, I’ll turn it over to Daniel.

Daniel Ek: All right. Thanks, Bryan and, hey, everyone, and thanks for joining us. I hope you’ve had the opportunity to review our shareholder deck to get a sense of what an incredible year 2023 was for Spotify. Throughout the year, we notched some really significant milestones and set numerous records. This included a 113 million net adds on the MAU side and premium net adds of 31 million, both the biggest full-year additions in our history. And our annual Wrapped experience also toppled previous levels of engagement, surpassing 2022 numbers in just the first 31 hours of the campaign. We accomplished all of this by significantly exceeding our own expectations when we entered the year and against the backdrop of global turmoil and uncertainty and Q4 was a continuation of the story.

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Q&A Session

And while I’m pleased with the level of growth we saw in 2023, perhaps what is even more gratifying is that it also marked a very different year for Spotify, a true evolution in how we operate our company, a year where we started to prove that we’re not just a company that has an amazing product, but one that also is building a great business. And there is no question that we had to make some difficult decisions to put us on track to achieve our goal of being a consistently profitable company. But by taking these steps, I’m super confident in where we’re heading. So looking into 2024, you should expect a continuation of what you saw in 2023, strong product development, which leads to strong growth, but with an increased focus on monetization and efficiency, which in turn drives profitability.

And I know some of you may start to wonder if we’re sacrificing growth for profitability. Long-term, we believe that the real value of Spotify is in solving problems at the intersection between creators and consumers. With scale, there will be even more opportunities to do so. Therefore, growth is still the most important thing we can deliver. However, equally true is that our hurdle rate for investment has increased. So, what gives? Well, as I’ve shared before, we have various levers to pull at different times to drive revenue growth. These include growing our users, creating new businesses with new revenue streams, and increasing revenue per user through price increases. In 2023, we leveraged all three throughout the year at various times, but this won’t always be the case.

You should expect to see a shift back and forth among prioritizing these three key elements based on a variety of considerations. And looking ahead, I believe 2024 is going to be another year of solid progress, led by an acceleration of revenue growth. That said, I think it is important to remind investors that we constantly modulate between what we spend most of our time focusing on. In some years, it’s focusing on growing the top of the funnel, and in some years, it’s about driving monetization of those users. The last few years has been extraordinary from the top-of-the-funnel perspective. Our aim is to continue this trend, but our focus in 2024 is more on how we monetize that growth. I also wanted to provide a quick update on our audiobooks business, which is performing well and we are very excited about its potential.

It’s still early days, but the feedback from listeners and from the industry is extremely encouraging. Data shows that our entry into this market has dramatically accelerated its overall growth. In Q4, we became the number two provider of audiobooks behind Audible, which is notable given how entrenched the legacy players are. And this is exactly what we set out to do, grow the pie for the publishing industry and expand the interest in audiobooks to an entirely new set of listeners. More to come as this takes hold and we roll it out to additional markets. Before I turn it over to Paul to provide more details on the numbers, I also wanted to take this opportunity with all of you on the line to thank him and wish him well. Although Paul is sticking around for a couple of more months, this will be his last earnings call.

He’s been a great partner and helped to solidify the position of the strength that we sit in today. So, thank you, Paul, for these years. I also wanted to give you a quick update on our CFO search. We are well underway and I’m happy with the caliber of the candidates that I’m seeing. As we enter this next phase of focusing on having both a great product and building a great business, I’m confident we will find the right person, someone who is passionate about driving the levels of efficiency and resourcefulness that are critical to our long-term success. Paul, thanks again, and over to you.

Paul Vogel: Great. Thanks, Daniel, and thanks, everyone, for joining us. I’d like to add a bit more color on the quarter and then touch upon the broader performance of the business and our outlook. Q4 is a very strong quarter. MAU grew by 28 million to 602 million and we added 10 million net subscribers, finishing at 236 million. Both MAU and subscriber growth continued to be above our historical trend and outperformed forecast. Revenue grew 16% year-over-year to EUR3.7 billion during the quarter. Excluding the effects of unfavorable currency movements, revenue grew 20% year-on-year, representing an acceleration of 300 basis points versus the prior quarter’s result, due to the ongoing effects of the new subscription pricing.

Turning to gross margin. Gross margin of 26.7% was above guidance by about 10 basis points, due primarily to favorability in our podcast business. We reported an operating loss of EUR75 million, which was better than guidance due mainly to lower-than-expected marketing spend and personnel and related costs. As we previously disclosed, our operating loss was impacted by about EUR143 million of charges related to the efficiency actions we announced in December. Excluding the one-time charges, we generated EUR68 million of adjusted operating profit, which is more than double the third quarter as the business continued its early-stage inflection towards sustainable growth and profitability. Finally, free cash flow was positive EUR396 million in Q4.

While some of the strength was timing related, we remain confident that we’ve entered a new chapter in terms of expanding the business, a business’ cash generation potential. Looking ahead to the first quarter guidance, we are forecasting 618 million MAU, an increase of 16 million from Q4 and 230 million subscribers, an increase of 3 million over Q4. We’re also forecasting a currency-neutral revenue growth rate of 20% plus year-on-year, pointing to EUR3.6 billion in total revenue. We also anticipate a gross margin of 26.4% and an operating profit of EUR180 million. While we no longer give full year guidance, we do expect healthy full year 2024 user growth that should be close to the average of the last few years, and we expect strong subscriber growth as well.

Gross margin and operating margin are both expected to improve throughout the year to deliver meaningful full year expansion with podcasting expected to deliver positive gross profit for the year. We also expect our free cash flow generation to meaningfully exceed what we generated in 2023. And finally, as Brian mentioned, Ben Kung, who has been a trusted partner of mine in Finance, is also on the call and we’re joining us for Q&A. And additionally, I’d like to thank Daniel and all of my colleagues over the past eight years for making my time at Spotify truly special. And with that, I’ll hand things back to Bryan for Q&A.

Bryan Goldberg: All right. Thanks, Paul. Again, if you’ve got any questions, please go to slido.com, #SpotifyEarningsQ423. We’re going to be reading the questions in the order they appear in the queue with respect to how people vote up their preference for questions. And our first question is going to come today from Doug Anmuth on podcasting. Have podcasts flipped into positive gross profit yet? And how do you think about inflection here through ’24 as you’re rationalizing content spending?

Daniel Ek: Yes, I’ll take this one, Doug. Yes. So I think just to level set with everyone, I think when we had our Investor Day last year, everyone was probably expecting our podcast business to be a net adder to the business and probably thought that the music margins was worse than what they ended up being and obviously, as we outlined then, podcasting was a drag to the business, but something we were committed to turn around. And I’m pleased to say in Q4, we were very close to breakeven on that business, which gives me a lot of confidence that as we get into 2024, we will achieve the full year profitability target on podcasting. And so when you think about then, what are the drivers for that to happen? Well, it’s really two drivers.

On the top line side, we’re still seeing healthy growth on engagement. That engagement in turns means there will be more opportunities for us to monetize those engagement hours, and that’s the top line. And then on the bottom line, we have doubled down on the deals that worked, and we have got really throughout 2023, gotten out of a lot of the deals that didn’t work. And that’s the result you’re now seeing with the close to breakeven and that then will lead to a positive podcasting business in 2024.

Bryan Goldberg: All right. Our next question is going to come from Michael Morris on margins. What are the most impactful steps that will help you progress towards your long-term music gross margin goal of 30% to 35%? And can you share more detail on the gross margin levers in 2024 and the relative impact you anticipate from each?