Spotify Technology S.A.

Gentlemen, thank you for standing by and welcome to Spotify's Q3 2020 earnings call. At this time, all participants are in a listen-only mode. If you require further assistance, please press star zero. I would now like to hand the call over to your speaker today, Brian Goldberg, head of investor relations. Thank you. Please go ahead.

Great. Thank you. And welcome to Spotify's third quarter 2020 earnings conference call. I hope everyone's continuing to stay safe. Our team is again hosting this call remotely. Our CEO, Daniel Ek, is participating from Stockholm. Paul Vogel, our CFO, is at his home office in New Jersey. And I'm joining from New York. We'll start with opening comments from Daniel. After the remarks, Daniel and Paul will be happy to answer your questions. We'll again be taking questions exclusively through Slido. Questions can be submitted by going to slido.com, S-L-I-D-O.com, and using the code hashtag SpotifyEarningsQ320. 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 investorrelations at ir at 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'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 6K. And with that, I'll turn the call over to Daniel.

Great. Hi, everyone, and thanks for joining us. So Q3 was a very strong quarter, surpassing our own expectations on several measures. And I think this is a testament to all the amazing contributions of the Spotify team when these uncertain times remain focused on the needs of our creators, fans, and partners around the world. Monthly active users beat the top end of our guidance and subscribers hit the very top end of our range. And our service now reaches 320 million users and 144 million subscribers. the size of our total catalog increased significantly, and our advertising business returned to growth. And we also beat expectations in our newest markets, where we're seeing growth continue to accelerate. I think this affirms our belief that there's a significant pent-up demand for Spotify around the world, even in places where our service has yet to launch. These results illustrate the power of our business despite COVID and other related challenges across the globe. And as a result of our performance this quarter, we have updated our Q4 guidance ranges to reflect increased optimism on where we expect to end the year. It's also worth noting that we've paid out more than a billion to rights holders in every quarter in 2020. And I'm proud to say that we're on track to pay another billion plus in Q4. In addition to sharing our results, I believe these calls are also time to help frame where we're headed. And our team remain laser focused on building the world's largest audio network. And while it's still early days, it's clear to us that our strategy is working. So we know that when we reach more listeners, we're able to attract more creators to our platform. So with more reach comes more content. And with more content, especially content unique to Spotify, there comes more opportunities to monetize. And that interplay is super important because it's really the foundation of our flywheel. And that flywheel continues to accelerate faster with every new user and creator that comes on our platform. Bottom line, as I look at the increase specifically in reach that we're seeing this quarter, it gives me the confidence in our ability to monetize that growth. So to fuel the flywheel, you'll see us continue to invest in enhancing our user experiencing, furthering market expansion, and develop and acquiring unique content for both new and established creators. And related to this, you've seen us make a few big moves in launching new content, so I would like to shed some light on how it's going. Our number of new podcasts increased over 20%, and music releases are up 13% over the prior quarter. And we saw a strong positive reaction when Michelle Obama and Joe Rogan's podcast launched during the quarter, and we're seeing great success with our original exclusives, which now account for more than 19% of all podcasts listening on the platform. In addition, we're hard at work on new content development that will roll out in the months ahead. And one of the residual benefits of our time indoors is that many creators have turned back to what they do best, which is creating. And as a result, future music releases look very strong too. And as we know, new music is now coming from artists like Billie Eilish, Drake, and Sir Paul McCartney, just to name a few. Another benefit of the investments that we made in our content and user experience is that Spotify listeners are enjoying greater value than ever before. And we believe this presents two distinct opportunities. So one, with about 60% of Spotify subscribers starting out in our free tier and our outperformance on MAUs in 2020, we are confident that we have a long runway to continue to grow our subscriber base in the months and years ahead. And two, long-term, if engagement and or our listener value per hour is high, it gives us the ability to selectively increase our price. So here's how I think about it. While our primary focus remains user growth, based on our maturity in certain markets and the increasing value we provide to our subscribers, including, of course, enhanced content, we've seen engagement and more specifically value per hour grow substantially over these past few years. And I believe an increase in value per hour is the most reliable signal